Federal Register, Volume 75 Issue 105 (Wednesday, June 2, 2010)

[Federal Register Volume 75, Number 105 (Wednesday, June 2, 2010)]
[Proposed Rules]
[Pages 30918-31117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-12567]

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Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Parts 412 and 413

Medicare Program; Prospective Payment Systems; 2010 and 2011 Rates;
Wage Indices; Proposed Rule and Notice

Federal Register / Vol. 75 , No. 105 / Wednesday, June 2, 2010 /
Proposed Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412 and 413

[CMS-1498-P2]
RIN 0938-AP80

Medicare Program; Supplemental Proposed Changes to the Hospital
Inpatient Prospective Payment Systems for Acute Care Hospitals and the
Long-Term Care Hospital Prospective Payment System and Supplemental
Proposed Fiscal Year 2011 Rates

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule is a supplement to the fiscal year (FY)
2011 hospital inpatient prospective payment systems (IPPS) and long-
term care prospective payment system (LTCH PPS) proposed rule published
in the May 4, 2010 Federal Register. This supplemental proposed rule
would implement certain statutory provisions relating to Medicare
payments to hospitals for inpatient services that are contained in the
Patient Protection and Affordable Care Act and the Health Care and
Education Reconciliation Act of 2010 (collectively known as the
Affordable Care Act). It would also specify statutorily required
changes to the amounts and factors used to determine the rates for
Medicare acute care hospital inpatient services for operating costs and
capital-related costs, and for long-term care hospital costs.

DATES: To be assured consideration, comments must be received at one of
the addresses provided below, no later than 5 p.m. on July 2, 2010.

ADDRESSES: In commenting, please refer to file code CMS-1498-P2.
Because of staff and resource limitations, we cannot accept comments by
facsimile (FAX) transmission.
You may submit comments in one of four ways (please choose only one
of the ways listed):
1. Electronically. You may submit electronic comments on this
regulation to http://www.regulations.gov. Follow the instructions for
submitting a comment.
2. By regular mail. You may mail written comments to the following
address ONLY: Centers for Medicare & Medicaid Services, Department of
Health and Human Services, Attention: CMS-1498-P2, P.O. Box 8011,
Baltimore, MD 21244-1850.
Please allow sufficient time for mailed comments to be received
before the close of the comment period.
3. By express or overnight mail. You may send written comments to
the following address ONLY: Centers for Medicare & Medicaid Services,
Department of Health and Human Services, Attention: CMS-1498-P2, Mail
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
4. By hand or courier. If you prefer, you may deliver (by hand or
courier) your written comments before the close of the comment period
to either of the following addresses:
a. For delivery in Washington, DC--Centers for Medicare & Medicaid
Services, Department of Health and Human Services, Room 445-G, Hubert
H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC
20201.
(Because access to the interior of the Hubert H. Humphrey Building
is not readily available to persons without Federal government
identification, commenters are encouraged to leave their comments in
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing
by stamping in and retaining an extra copy of the comments being
filed.)
b. For delivery in Baltimore, MD--Centers for Medicare & Medicaid
Services, Department of Health and Human Services, 7500 Security
Boulevard, Baltimore, MD 21244-1850.
If you intend to deliver your comments to the Baltimore address,
please call telephone number (410) 786-7195 in advance to schedule your
arrival with one of our staff members.
Comments mailed to the addresses indicated as appropriate for hand
or courier delivery may be delayed and received after the comment
period.
Submission of comments on paperwork requirements. You may submit
comments on this document's paperwork requirements by following the
instructions at the end of the ``Collection of Information
Requirements'' section in this document.
For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Tzvi Hefter, (410) 786-4487, and Ing-
Jye Cheng, (410) 786-4548, Operating Prospective Payment, Wage Index,
Hospital Geographic Reclassifications, Capital Prospective Payment,
Critical Access Hospital (CAH).
Michele Hudson, (410) 786-4487, and Judith Richter, (410) 786-2590,
Long-Term Care Hospital Prospective Payment.
Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital
Demonstration Program Issues.

SUPPLEMENTARY INFORMATION:
Inspection of Public Comments: All comments received before the
close of the comment period are available for viewing by the public,
including any personally identifiable or confidential business
information that is included in a comment. We post all comments
received before the close of the comment period on the following Web
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to
view public comments.
Comments received timely will also be available for public
inspection as they are received, generally beginning approximately 3
weeks after publication of a document, at the headquarters of the
Centers for Medicare & Medicaid Services, 7500 Security Boulevard,
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30
a.m. to 4 p.m. To schedule an appointment to view public comments,
phone 1-800-743-3951.

Electronic Access

This Federal Register document is also available from the Federal
Register online database through GPO Access, a service of the U.S.
Government Printing Office. Free public access is available on a Wide
Area Information Server (WAIS) through the Internet and via
asynchronous dial-in. Internet users can access the database by using
the World Wide Web, (the Superintendent of Documents' home Web page
address is http://www.gpoaccess.gov/), by using local WAIS client
software, or by telnet to swais.access.gpo.gov, then login as guest (no
password required). Dial-in users should use communications software
and modem to call (202) 512-1661; type swais, then login as guest (no
password required).

I. Background

On March 23, 2010, the Patient Protection and Affordable Care Act
(Pub. L. 111-148) was enacted. Following the enactment of Public Law
111-148, the Health Care and Education Reconciliation Act of 2010
Public Law 111-152 (enacted on March 30, 2010), amended certain
provisions of Public Law 111-148. These public laws are collectively
known as the Affordable Care Act. A number of the provisions of Public
Law 111-148, affect the IPPS and the LTCH PPS and the providers and
suppliers addressed in this proposed

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rule. However, due to the timing of the passage of the legislation,
were unable to address those provisions in the FY 2011 IPPS and LTCH
PPS proposed rule that appeared in the May 4, 2010 Federal Register (75
FR 23852). Therefore, the proposed policies and payment rates in that
proposed rule did not reflect the new legislation. We noted in that
proposed rule that we would issue separate Federal Register documents
addressing the provisions of Public Law 111-148 that affect our
proposed policies and payment rates for FY 2010 and FY 2011 under the
IPPS and the LTCH PPS. This supplementary proposed rule addresses the
following provisions of the new legislation that affect the following
FY 2011 proposed policies:
Hospital wage index improvement related to geographic
reclassification criteria for FY 2011 (section 3137 of Pub. L. 111-
148).
National budget neutrality in the calculation of the rural
floor for hospital wage index (section 3141 of Pub. L. 111-148).
Protections for frontier States (section 10324 of Pub. L.
111-148).
Revisions of certain market basket updates (sections 3401
and 10319 of Pub. L. 111-148 and section 1105 of Pub. L. 111-152).
Temporary improvements to the low-volume hospital
adjustment (sections 3125 and 10314 of Pub. L. 111-148).
Extension of Medicare-dependent hospitals (MDHs) (section
3124 of Pub. L. 111-148).
Additional payments in FYs 2011 and 2012 for qualifying
hospitals in the lowest quartile of per capital Medicare spending
(section 1109 of Pub. L. 111-152).
Extension of the rural community hospital demonstration
(section 3123 of Pub. L. 111-148).
Technical correction related to critical access hospital
(CAH) services (section 3128 of Pub. L. 111-148).
Extension of certain payment rules for long-term care
hospital services and of moratorium on the establishment of certain
hospitals and facilities (sections 3106 and 10312 of Pub. L. 111-148).
We also noted that we plan to issue further instructions
implementing the provisions of Public Law 111-148 that affect the
policies and payment rates for FY 2010 under the IPPS and for RY 2010
under the LTCH PPS in a separate document published elsewhere in this
Federal Register.

II. Provisions of the Proposed Regulations

In this section of this supplementary proposed rule, we address the
provisions of Public Law 111-148, that affect our proposed policies and
payment rates for FY 2011 under the IPPS and the LTCH PPS.

A. Changes to the Acute Care Hospital Wage Index

1. Plan for Reforming the Wage Index
Section 3137(b) of Public Law 111-148 requires the Secretary of
Health and Human Services to submit to Congress, not later than
December 31, 2011, a report that includes a plan to reform the Medicare
wage index applied under the Medicare IPPS. In developing the plan, the
Secretary of Health and Human Services must take into consideration the
goals for reforming the wage index that were set forth by the MedPAC in
its June 2007 report entitled, ``Report to Congress: Promoting Greater
Efficiency in Medicare'', including establishing a new system that --
Uses Bureau of Labor of Statistics (BLS) data, or other
data or methodologies, to calculate relative wages for each geographic
area;
Minimizes wage index adjustments between and within MSAs
and statewide rural areas;
Includes methods to minimize the volatility of wage index
adjustments while maintaining budget neutrality in applying such
adjustments;
Takes into account the effect that implementation of the
system would have on health care providers and on each region of the
country;
Addresses issues related to occupational mix, such as
staffing practices and ratios, and any evidence on the effect on
quality of care or patient safety as a result of the implementation of
the system; and
Provides for a transition.

In addition, section 3137(b)(3) of Public Law 111-148 requires the
Secretary of Health and Human Services to consult with relevant
affected parties in developing the plan. Although the provisions of
section 3137(b) of Public Law 111-148 will not have an actual impact on
the FY 2011 wage, we are notifying the public of the provisions so that
they may provide comments and suggestions on how they may participate
in developing the plan.
2. Provisions on Wage Comparability and Rural/Imputed Floor Budget
Neutrality
Sections 3137(c) and 3141 of Public Law 111-148 affect
reclassification average hourly wage comparison criteria and rural and
imputed floor budget neutrality provisions for FY 2011.
a. Reclassification Average Hourly Wage Comparison Criteria
In the FY 2009 IPPS final rule, we adopted the policy to adjust the
reclassification average hourly wage standard, comparing a
reclassifying hospital's (or county hospital group's) average hourly
wage relative to the average hourly wage of the area to which it seeks
reclassification. (We refer readers to the FY 2009 IPPS final rule for
a full discussion of the basis for the proposals the public comments
received and the FY 2009 final policies.) We provided for a phase-in of
the adjustment over 2 years. For applications for reclassification for
the first transitional year, FY 2010, the average hourly wage standards
were set at 86 percent for urban hospitals and group reclassifications,
and 84 percent for rural hospitals. For applications for
reclassification for FY 2011 (for which the application deadline was
September 1, 2009) and for subsequent fiscal years, the average hourly
wage standards were 88 percent for urban and group reclassifications
and 86 percent for rural hospitals. Sections 412.230, 412.232, and
412.234 of the regulations were revised accordingly. These policies
were adopted in the FY 2009 IPPS final rule and were reflected in the
wage index in the Addendum to the FY 2011 IPPS proposed rule, which
appeared in the Federal Register on May 4, 2010.
However, provisions of section 3137(c) of Public Law 111-148
recently revised the average hourly wage standards. Specifically,
section 3137(c) restores the average hourly wage standards that were in
place for FY 2008 (that is, 84 percent for urban hospitals, 85 percent
for group reclassifications, and 82 percent for rural hospitals) for
applications for reclassification for FY 2011 and for each subsequent
fiscal year until the first fiscal year beginning on or after the date
that is one year after the Secretary of Health and Human Services
submits a report to Congress on a plan for reforming the wage index
under 3137(b) of Public Law 111-148. Section 3137(c) of Public Law 111-
148 also requires the revised average hourly wage standards to be
applied in a budget neutral manner. We note that section 3137(c) of
Public Law 111-148 does not provide for the revised average hourly wage
standards to be applied retroactively, nor does it change the statutory
deadline for applications for reclassification for FY 2011. Under
section 1886(d)(10) of the Act, the Medicare Geographic Classification
Review Board (MGCRB) considers

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applications by hospitals for geographic reclassification for purposes
of payment under the IPPS. Hospitals must apply to the MGCRB to
reclassify 13 months prior to the start of the fiscal year for which
reclassification is sought (generally by September 1). For
reclassifications for the FY 2011 wage index, the deadline for
applications was September 1, 2009 (74 FR 43838).
In implementing section 3137(c) of Public Law 111-148, we requested
the assistance of the MGCRB in determining, for applications received
by September 1, 2009, whether additional hospitals would qualify for
reclassification for FY 2011 based on the revised average hourly wage
standards of 84 percent for urban hospitals, 85 percent for group
reclassifications, and 82 percent for rural hospitals. We determined
that 18 additional hospitals would qualify for reclassification for FY
2011. Also, 5 hospitals, for which the MGCRB granted reclassifications
to their secondary requested areas for FY 2011, would qualify for
reclassifications instead to their primary requested areas because they
now meet the average hourly wage criteria to reclassify to those areas.
Therefore, in accordance with Sec. 412.278 of the regulations, in
which paragraph (c) provides the Administrator discretionary authority
to review any final decision of the MGCRB, we submitted a letter to the
Administrator requesting that she review and amend the MGCRB's decision
and grant the 23 hospitals their requested reclassifications (or
primary reclassifications) for FY 2011.
The wage index in the Addendum to this supplemental FY 2011 IPPS
proposed rule reflects these changes in hospital reclassifications,
although the Administrator had not issued all of her decisions by the
date of this proposed rule. In calculating the wage index in this
proposed rule, we made assumptions that the Administrator would grant
the 23 hospitals their requested reclassifications (or primary
reclassifications) and that the hospitals would not request the
Administrator to amend her decisions. Generally, these
reclassifications would result in the highest possible wage index for
the hospitals. Any changes to the wage index, as a result of the
Administrator's actual decision issued under Sec. 412.278(c), or an
amendment of the Administrator's decision issued under paragraph (g),
will be reflected in the FY 2011 IPPS final rule.
In accordance with the requirements in section 3137(c) of
Affordable Care Act, we are modifying Sec. 412.230, Sec. 412.232, and
Sec. 412.234 of the regulations to codify the revised average hourly
wage standards.
b. Budget Neutrality Adjustment for the Rural and Imputed Floors
In the FY 2009 IPPS final rule (73 FR 48574 through 48575), we
adopted State level budget neutrality (rather than the national budget
neutrality adjustment) for the rural and imputed floors, effective
beginning with the FY 2009 wage index and incorporated this policy in
our regulation at Sec. 412.64(e)(4). Specifically, the regulations
specified that CMS makes an adjustment to the wage index to ensure that
aggregate payments after implementation of the rural floor under
section 4410 of the Balanced Budget Act of 1997 (Pub. L. 105-33) and
the imputed floor under Sec. 412.64(h)(4) are made in a manner that
ensures that aggregate payments to hospitals are not affected and that,
beginning October 1, 2008, we would transition from a nationwide
adjustment to a statewide adjustment, with a statewide adjustment fully
in place by October 1, 2010.
These policies for the rural and imputed floors were adopted in the
FY 2009 IPPS final rule and were reflected in the wage index in the
Addendum to the FY 2011 IPPS/LTCH PPS proposed rule, published in the
Federal Register on May 4, 2010. However, these policies were recently
changed by the provisions of section 3141 of Public Law 111-148.
Specifically, section 3141 of Affordable Care Act rescinds our policy
establishing a statewide budget neutrality adjustment for the rural and
imputed floors and, instead, restores it to a uniform, national
adjustment, beginning with the FY 2011 wage index. Additionally, the
imputed floor, is set to expire on September 30, 2011. We do not read
section 3141 of Public Law 111-148 as altering this expiration date.
Section 3141 of Public Law 111-148 requires that we ``administer
subsection (b) of such section 4410 and paragraph (e) of * * * section
412.64 in the same manner as the Secretary administered such subsection
(b) and paragraph (e) for discharges occurring during fiscal year 2008
(through a uniform, national adjustment to the area wage index).''
Thus, section 3141 of Public Law 111-148 is governing how we apply
budget neutrality, under the authorities of Sec. 412.64(e) and section
4410(b) of the Balanced Budget Act, but it does not alter Sec.
412.64(h) of our regulations (which includes the imputed floor and its
expiration date). To the extent there is an imputed floor, section 3141
of Public Law 111-148 governs budget neutrality for that floor, but it
does not continue the imputed floor beyond the expiration date already
included in our regulations.
Therefore, the wage index in the Addendum to this supplemental FY
2011 IPPS proposed rule reflects a uniform, national budget neutrality
adjustment for the rural and imputed floors, which is a factor of
0.995425.
3. Frontier States Floor (Sec. 412.64)
In accordance with section 10324(a) of Affordable Care Act,
beginning in FY 2011, the statute provides for establishing an
adjustment to create a wage index floor of 1.00 for all hospitals
located in States determined to be Frontier States. The statute defines
any State as a Frontier State if at least 50 percent of the State's
counties are determined to be Frontier Counties. The statute defines as
counties that have a population density less than 6 persons per square
mile. The law requires that this provision shall not apply to hospitals
in Alaska or Hawaii receiving a non-labor related share adjustment
under section 1886(d)(5)(H) of the Act.
To implement this provision, we propose to identify Frontier
Counties by analyzing population data and county definitions based upon
the most recent annual Population Estimates published by the U.S.
Census Bureau. We will divide each county's population total by each
county's reported land area (according to the decennial census) in
square miles to establish population density. We also propose to update
this analysis from time to time, such as upon publication of a
subsequent decennial census, and if necessary, add or remove qualifying
States from the list of Frontier States based on the updated analysis.
For a State that qualifies as a Frontier State, in accordance with
section 10324(a) of Public Law 111-148, all PPS hospitals located
within that State will receive either the higher of its post-
reclassification wage index rate, or a minimum value of 1.00. We
propose that, for a hospital that is geographically located in a
Frontier State and is reclassified under section 1886(d)(10) of the Act
to a CBSA in a non-Frontier State, the hospital will receive a wage
index that is the higher of the reclassified area wage index or the
minimum wage index of 1.00. In accordance with section 10324(a) of
Public Law 111-148, the Frontier State adjustment will not be subject
to budget neutrality under section 1886(d)(3)(E) of the Act, and will
only be extended to hospitals geographically located within a Frontier
State. We propose to calculate and apply the Frontier State floor
adjustments after rural and imputed floor budget neutrality adjustments
are

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calculated for all labor market areas, so as to ensure that no hospital
in a Frontier State will receive a wage index lesser than 1.00 due to
the rural and imputed floor adjustment. We invite public comment on
these proposals regarding our methods for determining Frontier States,
and for calculation and application of the adjustment.
For the proposed FY 2011 IPPS wage index, the Frontier States are
the following: Reflected in the following table:

Table 1--Frontier States Under Section 10324(a)
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Percent
State Total Frontier frontier
counties counties counties
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Montana.......................... 56 45 80
Wyoming.......................... 23 17 74
North Dakota..................... 53 36 68
Nevada........................... 17 11 65
South Dakota..................... 66 34 52
------------------------------------------------------------------------
Frontier States are identified by a footnote in Table 4D-2 of the
Addendum to this supplemental proposed rule. Population Data set:
http://www.census.gov/popest/estimates.html (2009 County Total
Population Estimates).
Land Area Dataset http://factfinder.census.gov/ (Decennial: Census
Geographic Comparison Tables: ``United States--County by State and for
Puerto Rico'').

4. Revised FY 2011 IPPS Proposed Rule Wage Index Tables
The revised IPPS proposed wage index values for FY 2011, reflecting
the provisions of sections 3137(c), 3141, and 10324 of Public Law 111-
148, are included in Tables 2, 4A, 4B, 4C, and 4D-2 of the Addendum to
this supplemental FY 2011 IPPS/LTCH PPS proposed rule.
Table 4D-1, which listed the statewide rural and imputed floor
budget neutrality factors, is eliminated from the Addendum to this
supplemental FY 2011 IPPS/LTCH PPS proposed rule and is no longer
applicable for the wage index because section 3141 of Public Law 111-
148 instead requires the application of a national adjustment.
Table 4J, which lists the out-migration adjustment for a qualifying
county, is revised due to the above provisions of Affordable Care Act.
Additionally, Table 9A, the list of hospitals that are reclassified or
redesignated for FY 2011, is revised according to section 3137(c) of
Public Law 111-148. Both revised tables are included in the Addendum to
this supplemental FY 2011 IPPS/LTCH PPS proposed rule.
Tables 3A and 3B, which list the 3-year average hourly wage for
each labor market area before the redesignation or reclassification of
hospitals, Table 4E, the list of urban CBSAs and constituent counties,
Table 4F, the Puerto Rico wage index, and Table 9C, the list of
hospitals redesignated under section 1886(d)(8)(E) of the Act, are
unaffected by the above provisions of Affordable Care Act. Therefore,
these tables are unchanged from the initial FY 2011 IPPS/LTCH PPS
proposed rule and are not included in the Addendum to this supplemental
FY 2011 IPPS/LTCH PPS proposed rule.
5. Procedures for Withdrawing Reclassifications in FY 2011
Section 1886(d)(10)(D)(v) of the Act states that the Secretary
should establish procedures under which a subsection (d) hospital may
elect to terminate a reclassification before the end of a 3-year
period, but does not contain any other specifics regarding how such
termination should occur. Our rules at 42 CFR 412.273 state that
hospitals that have been reclassified by the MGCRB are permitted to
withdraw their applications within 45 days of the publication of CMS's
annual notice of proposed rulemaking. For purposes of this
supplementary proposed rule, we interpret our regulation as referring
to the initial FY 2011 IPPS/LTCH PPS proposed rule (which appeared in
the May 4, 2010 Federal Register), and our procedure for this
supplementary proposed rule is to start the time period for requesting
a withdrawal or termination from publication of that initial proposed
rule. Were we not to use such a time period, requests for termination
and withdrawal would be received too late to include in our final rule.
Thus, all requests for withdrawal of an application for
reclassification or termination of an existing 3-year reclassification
that would be effective in FY 2011 must be received by the MGCRB by
June 18, 2010.
We note that wage index values in the tables in the Addendum to
this supplemental FY 2011 IPPS/LTCH PPS proposed rule may have changed
somewhat from the initial, more comprehensive FY 2011 IPPS/LTCH PPS
proposed rule (which appeared in the May 4, 2010 Federal Register) due
to the application of sections 3137(c), 3141, and 10324 of Affordable
Care Act. In addition, as a result of section 3137(c) of Affordable
Care Act, there may be additional hospitals listed as reclassified in
Table 9A in the Addendum to this supplemental proposed rule. Hospitals
have sufficient time between the display or publication date of this
supplemental FY 2011 IPPS/LTCH PPS proposed rule in the Federal
Register and the June 18, 2010 deadline for withdrawals and
terminations to evaluate and make determinations regarding their
reclassification for the FY 2011 wage index. As noted in the initial FY
2011 IPPS proposed rule, the mailing address of the MGCRB is: 2520 Lord
Baltimore Drive, Suite L, Baltimore, MD 21244-2670.

B. Inpatient Hospital Market Basket Update

Below we discuss the adjustments to the FY 2010 and FY 2011 market
basket as required by the Affordable Care Act. In this supplemental
proposed rule we are not proposing to address the provisions of section
3401 of Public Law 111-148 providing for a productivity adjustment for
FY 2012 and subsequent fiscal years; rather, this change will be
addressed in future rulemaking.
1. FY 2010 Inpatient Hospital Update
In accordance with section 1886(b)(3)(B)(i) of the Act, each year
we update the national standardized amount for inpatient operating
costs by a factor called the ``applicable percentage increase.'' Prior
to enactment of Public Law 111-148 and Public Law 111-152, section
1886(b)(3)(B)(i)(XX) of the Act set the applicable percentage increase
equal to the rate-of-increase in the hospital market basket for IPPS
hospitals in all areas, subject to the hospital submitting quality
information under rules established by the Secretary in accordance with
section 1886(b)(3)(B)(viii) of the Act. For

[[Page 30922]]

hospitals that do not provide these data, the update is equal to the
market basket percentage increase less an additional 2.0 percentage
points. In accordance with these statutory provisions, in the FY 2010
IPPS/LTCH PPS final rule (74 FR 43850), we finalized an applicable
percentage increase equal to the full market basket update of 2.1
percent based on IHS Global Insight, Inc.'s second quarter 2009
forecast of the FY 2010 market basket increase, provided the hospital
submits quality data in accordance with our rules. For hospitals that
do not submit quality data, in the FY 2010 IPPS/LTCH PPS final rule we
finalized an applicable percentage increase equal to 0.1 percent (that
is, the FY 2010 estimate of the market basket rate-of-increase minus
2.0 percentage points).
Sections 3401(a) and 10319 of Public Law 111-148 amend section
1886(b)(3)(B)(i) of the Act. Specifically, sections 3401(a) and
10319(a) of Public Law 111-148 amend section 1886(b)(3)(B)(i) of the
Act to set the FY 2010 applicable percentage increase for IPPS
hospitals equal to the rate-of-increase in the hospital market basket
for IPPS hospitals in all areas minus a 0.25 percentage point, subject
to the hospital submitting quality information under rules established
by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the
Act. For hospitals that do not provide these data, the update is equal
to the market basket percentage increase minus 0.25 percentage point
less an additional 2.0 percentage points. Section 3401(a)(4) of Public
Law 111-148 further states that these amendments may result in the
applicable percentage increase being less than zero. Although these
amendments modify the applicable percentage increase applicable to the
FY 2010 rates under the IPPS, section 3401(p) of Public Law 111-148
states that the amendments do not apply to discharges occurring prior
to April 1, 2010. In other words, for discharges occurring on or after
October 1, 2009 and prior to April 1, 2010, the rate for a hospital's
inpatient operating costs under the IPPS will be based on the
applicable percentage increase set forth in the FY 2010 IPPS/LTCH PPS
final rule.
We are proposing to revise 42 CFR 412.64(d) to reflect current law.
Specifically, in accordance with section 1886(b)(3)(B)(i) of the Act as
amended by sections 3401(a) and 10319(a) of Public Law 111-148, we are
proposing to revise Sec. 412.64(d) to state that for the first half of
FY 2010 (that is, discharges on or after October 1, 2009 through March
30, 2010), the applicable percentage change equals the market basket
index for IPPS hospitals (which is defined under Sec. 413.40(a)) in
all areas for hospitals that submit quality data in accordance with our
rules, and the market basket index for IPPS hospitals in all areas less
2.0 percentage for hospitals that fail to submit quality data in
accordance with our rules. As noted above, in the FY 2010 IPPS/LTCH PPS
final rule, we calculated that the full market basket update equals 2.1
percent based on IHS Global Insight, Inc.'s second quarter 2009
forecast of the FY 2010 market basket increase. In addition, we are
proposing to revise Sec. 412.64(d) to state that for the second half
of FY 2010 (discharges on or after April 1, 2010 through September 30,
2010), in accordance with section 3401(a), we are proposing to set the
applicable percentage change equal to the market basket index for IPPS
hospitals in all areas reduced by 0.25 percentage points for hospitals
that submit quality data in accordance with our rules. For those
hospitals that fail to submit quality data, in accordance with our
rules, we are proposing to reduce the market basket index for IPPS
hospitals by an additional 2.0 percentage points (which is in addition
to the 0.25 percentage point reduction required by section
1886(b)(3)(B)(i) of the Act as amended by section 3401(a) of Public Law
111-148 as amended by section 10319(a) of Public Law 111-148. Based on
IHS Global Insight, Inc.'s second quarter 2009 forecast of the FY 2010
market basket increase, the FY 2010 applicable percentage change that
applies to rates for inpatient hospital operating costs under the IPPS
for discharges occurring in the second half of FY 2010 is 1.85 percent
(that is, the FY 2010 estimate of the market basket rate-of-increase of
2.1 percent minus 0.25 percentage points) for hospitals in all areas,
provided the hospital submits quality data in accordance with our
rules. For hospitals that do not submit quality data, the payment
update to the operating standardized amount is -0.15 percent (that is,
the adjusted FY 2010 estimate of the market basket rate-of-increase of
1.85 percent minus 2.0 percentage points).
Section 1886(b)(3)(B)(iv) of the Act provides that the applicable
percentage increase applicable to the hospital-specific rates for SCHs
and MDHs equals the applicable percentage increase set forth in section
1886(b)(3)(B)(i) of the Act (that is, the same update factor as for all
other hospitals subject to the IPPS). Because the Act sets the update
factor for SCHs and MDHs equal to the update factor for all other IPPS
hospitals, the update to the hospital specific rates for SCHs and MDHs
is also subject to the amendments to section 1886(b)(3)(B)(i) made by
section 3401(a) of Public Law 111-148. Accordingly, for hospitals paid
for their inpatient operating costs on the basis of a hospital-specific
rate, the rates paid to such hospitals for discharges occurring during
the first half of FY 2010 will be based on an annual update estimated
to be 2.1 percent for hospitals submitting quality data or 0.1 percent
for hospitals that fail to submit quality data; and the rates paid to
such hospitals for the second half of FY 2010 will be based on an
update that is estimated to be 1.85 percent for hospitals submitting
quality data or -0.15 percent for hospitals that fail to submit quality
data. Similar to that stated above, we are proposing to update
Sec. Sec. 412.73(c)(15), 412.75(d), 412.77(e), 412.78(e), 412.79(d) to
reflect current law.
2. FY 2011 Inpatient Hospital Update
As with the FY 2010 applicable percentage increase, section 3401(a)
of Public Law 111-148 as amended by section 10319(a) of Public Law 111-
148, amends section 1886(b)(3)(B)(i) of the Act to provide that the FY
2011 applicable percentage increase for IPPS hospitals equals the rate-
of-increase in the hospital market basket for IPPS hospitals in all
areas reduced by 0.25 percentage point, subject to the hospital
submitting quality information under rules established by the Secretary
in accordance with section 1886(b)(3)(B)(viii) of the Act. For
hospitals that do not provide these data, the update is equal to the
market basket percentage increase minus a 0.25 percentage point less an
additional 2.0 percentage points. Section 3401(a)(4) of Public Law 111-
148 further states that this amendment may result in the applicable
percentage increase being less than zero.
In Appendix B of the FY 2011 IPPS/LTCH PPS proposed rule, we
announced that due to the timing of the passage of Public Law 111-148,
we were unable to address those provisions in the proposed rule. In
that proposed rule, consistent with current law, based on IHS Global
Insight, Inc.'s first quarter 2010 forecast, with historical data
through the 2009 fourth quarter, of the FY 2011 IPPS market basket
increase, we estimated that the FY 2011 update to the operating
standardized amount would be 2.4 percent (that is, the current estimate
of the market basket rate-of-increase) for hospitals in all areas,
provided the hospital submits quality data in accordance with our
rules. For hospitals that do not submit

[[Page 30923]]

quality data, we estimated that the update to the operating
standardized amount would be 0.4 percent (that is, the current estimate
of the market basket rate-of-increase minus 2.0 percentage points).
Since publication of the FY 2011 IPPS/LTCH PPS proposed rule our
estimate of the market basket for FY 2011 has not changed. However,
consistent with the amendments to section 1886(b)(3)(B)(i) of the Act
made by section 3401 of Public Law 111-148, for FY 2011 we are required
to reduce the hospital market basket update by 0.25 percentage points.
Therefore, based on IHS Global Insight, Inc.'s first quarter 2010
forecast of the FY 2011 market basket increase, the estimated update to
the FY 2011 operating standardized amount is 2.15 percent (that is, the
FY 2011 estimate of the market basket rate-of-increase of 2.4 percent
minus 0.25 percentage points) for hospitals in all areas, provided the
hospital submits quality data in accordance with our rules. For
hospitals that do not submit quality data, the estimated update to the
operating standardized amount is 0.15 percent (that is, the adjusted FY
2011 estimate of the market basket rate-of-increase of 2.15 percent
minus 2.0 percentage points). We are proposing to revise Sec.
412.64(d) to reflect the provisions of section 3401(a) of Public Law
111-148.
Section 1886(b)(3)(B)(iv) of the Act provides that the FY 2011
applicable percentage increase in the hospital-specific rates for SCHs
and MDHs equals the applicable percentage increase set forth in section
1886(b)(3)(B)(i) of the Act (that is, the same update factor as for all
other hospitals subject to the IPPS). Similar to the FY 2010 applicable
percentage increase in the hospital-specific rates, because the Act
requires us to apply to the hospital-specific rates the update factor
for all other IPPS hospitals, the update to the hospital specific rates
for SCHs and MDHs is also subject to section 1886(b)(3)(B)(i) as
amended by the Affordable Care Act. Accordingly, the update to the
hospital-specific rates applicable to SCHs and MDHs is estimated to be
2.15 for hospitals that submit quality data or 0.15 percent for
hospitals that fail to submit quality data. Similar to above, we are
proposing to update Sec. Sec. 412.73(c)(15), 412.75(d), 412.77(e),
412.78(e), 412.79(d) to implement this provision.
3. FY 2010 and FY 2011 Puerto Rico Hospital Update
Puerto Rico hospitals are paid a blended rate for their inpatient
operating costs based on 75 percent of the national standardized amount
and 25 percent of the Puerto Rico-specific standardized amount. Section
1886(d)(9)(C)(i) of the Act is the basis for determining the applicable
percentage increase applied to the Puerto Rico-specific standardized
amount. Section 1886(d)(9)(C)(i) of the Act provides that the Puerto
Rico standardized amount shall be adjusted in accordance with the final
determination of the Secretary under section 1886(d)(4) of the Act.
Section 1886(e)(4)(1) of the Act in turn directs the Secretary to
recommend an appropriate change factor for Puerto Rico hospitals taking
into account amounts necessary for the efficient and effective delivery
of medically appropriate and necessary care of high quality, as well as
the recommendations of MedPAC. In order to maintain consistency between
the portion of the rates paid to Puerto Rico hospitals under the IPPS
based on the national standardized amount and the portion based on the
Puerto Rico-specific standardized rate, beginning in FY 2004 we have
set the update to the Puerto Rico-specific operating standardized
amount equal to the update to the national operating standardized
amount for all IPPS hospitals. This policy is reflected in our
regulations at 42 CFR 412.211.
The amendments to section 1886(b)(3)(B)(i) of the Act by sections
3401(a) and section 10319(a) of Public Law 111-148, affect only the
update factor applicable to the national standardized rate for IPPS
hospitals and the hospital-specific rates; they do not mandate any
revisions to the update factor applicable to the Puerto Rico-specific
standardized amount. Rather, as noted above, sections 1886(d)(9)(C)(i)
and (e)(4) of the Act direct us to adopt an appropriate change factor
for the FY 2010 Puerto Rico-specific standardized amount, which we did
in the FY 2010 IPPS/LTCH PPS final rule after notice and consideration
of public comments. Therefore, we do not believe we have the authority
to now propose setting the FY 2010 update factor for the Puerto Rico-
specific operating standardized amount for the second half of FY 2010
equal to the update factor applicable to the national standardized
amount or the hospital-specific rates (that is the market basket minus
0.25 percentage points). Accordingly, the FY 2010 update to the Puerto
Rico-specific operating standardized amount is 2.1 percent (that is,
the FY 2010 estimate of the market basket rate-of-increase) for the
entire FY 2010.
For FY 2011, consistent with our past practice of applying the same
update factor to the Puerto Rico-specific standardized amount as
applied to the national standardized amount, we are proposing to revise
Sec. 412.211(c) to set the update factor for the Puerto Rico-specific
operating standardized amount equal to the update factor applied to the
national standardized amount for all IPPS hospitals. Therefore, we are
proposing an update factor for the Puerto Rico-specific standardized
amount equal to the FY 2011 estimate of the IPPS operating market
basket rate-of-increase of 2.4 percent minus 0.25 percentage points, or
2.15 percent, for FY 2011.

C. Payment Adjustment for Low-Volume Hospitals (Sec. 412.101)

Section 1886(d)(12) of the Act, as added by section 406 of Public
Law 108-173, provides for a payment adjustment to account for the
higher costs per discharge for low-volume hospitals under the IPPS,
effective beginning FY 2005. Sections 3215 and 10314 of Public Law 111-
148 amend the definition of a low-volume hospital under section
1886(d)(12)(C) of the Act. It also revises the methodology for
calculating the payment adjustment for low-volume hospitals.
1. Background
Prior to being amended by the Affordable Care Act, section
1886(d)(12)(C)(i) of the Act defined a low-volume hospital as ``a
subsection (d) hospital (as defined in paragraph (1)(B)) that the
Secretary determines is located more than 25 road miles from another
subsection (d) hospital and that has less than 800 discharges during
the fiscal year.'' Section 1886(d)(12)(C)(ii) of the Act further
stipulates that ``the term ``discharge'' means an inpatient acute care
discharge of an individual regardless of whether the individual is
entitled to benefits under Part A.'' Therefore, the term refers to
total discharges, not merely Medicare discharges. Finally, under
section 406, the provision requires the Secretary to determine an
applicable percentage increase for these low-volume hospitals based on
the ``empirical relationship'' between ``the standardized cost-per-case
for such hospitals and the total number of discharges of such hospitals
and the amount of the additional incremental costs (if any) that are
associated with such number of discharges.'' The statute thus mandates
that the Secretary develop an empirically justifiable adjustment based
on the relationship between costs and discharges for these low-volume
hospitals. The statute also limits the adjustment to no more than 25
percent.

[[Page 30924]]

Based on an analysis we conducted for the FY 2005 IPPS final rule
(69 FR 49099 through 49102), a 25 percent low-volume adjustment to all
qualifying hospitals with less than 200 discharges was found to be most
consistent with the statutory requirement to provide relief to low-
volume hospitals where there is empirical evidence that higher
incremental costs are associated with low numbers of total discharges.
In the FY 2006 IPPS final rule (70 FR 47432 through 47434), we
stated that a multivariate analyses supported the existing low-volume
adjustment implemented in FY 2005. Therefore, the low-volume adjustment
of an additional 25 percent would continue to be provided for
qualifying hospitals with less than 200 discharges.
2. Temporary Changes for FYs 2011 and 2012
Section 1886(d)(12) of the Act was amended by sections 3125 and
10314 of Public Law 111-148. These changes are effective only for FYs
2011 and 2012. Beginning with FY 2013, the pre-existing low-volume
hospital payment adjustment and qualifying criteria, as implemented in
FY 2005, will resume.
Section 3125(3) and 10314(1) of Public Law 111-148 amend the
qualifying criteria for low-volume hospitals under section
1886(d)(12)(C) of the Act to make it easier for hospitals to qualify
for the low-volume adjustment. Specifically, the revised provision
specifies that for FYs 2011 and 2012, a hospital qualifies as a low-
volume hospital if it is ``more than 15 road miles from another
subsection (d) hospital and has less than 1,600 discharges of
individuals entitled to, or enrolled for, benefits under Part A during
the fiscal year.'' In addition, section 1886(d)(12)(C) of the Act, as
amended, provides that the payment adjustment (the applicable
percentage increase) is to be determined ``using a continuous linear
sliding scale ranging from 25 percent for low-volume hospitals with 200
or fewer discharges of individuals entitled to, or enrolled for,
benefits under Part A in the fiscal year to 0 percent for low-volume
hospitals with greater than 1,600 discharges of such individuals in the
fiscal year.''
Section 3125(3)(A) of Public Law 111-148 revises the distance
requirement for FYs 2011 and 2012 from ``25 road miles'' to ``15 road
miles'' such that a low volume hospital is required to be only more
than 15 road miles, rather than more than 25 road miles, from another
subsection (d) hospital for purposes of qualifying for the low-volume
payment adjustment in FYs 2011 and 2012. We therefore are proposing to
revise our regulations at 42 CFR 412.101(a)(2) to provide that to
qualify for the low volume adjustment in FYs 2011 and 2012, a hospital
must be more than 15 road miles from the nearest subsection (d)
hospital. The statute specifies the 15 mile distance in ``road miles''.
The current regulations at 42 CFR 412.101 also specify the current 25
mile distance requirement in ``road miles,'' but do not provide a
definition of the term ``road miles.'' We are proposing to define the
term ``road miles'' consistent with the term ``miles'' as defined at
Sec. 412.92 for purposes of determining whether a hospital qualifies
as a sole community hospital. Specifically, the regulations at 42 CFR
412.92(c)(i) define ``miles'' as ``the shortest distance in miles
measured over improved roads. An improved road for this purpose is any
road that is maintained by a local, State, or Federal government entity
and is available for use by the general public. An improved road
includes the paved surface up to the front entrance of the hospital.''
We note that while the proposed change in the qualifying criteria from
25 to 15 road miles is applicable only for FYs 2011 and 2012, the
proposed definition of ``road miles'' would continue to apply even
after the distance requirement reverts to 25 road miles beginning in FY
2013.
Sections 3125(3)(B) and (4)(D) and 10314(1) and (2) of Public Law
111-148, revise the discharge requirement for FYs 2011 and 2012 to less
than 1,600 discharges of individuals entitled to, or enrolled for,
benefits under Part A. Based on section 406 of Public Law 108-173, the
discharge requirement to qualify as a low-volume hospital prior to FY
2011 and subsequent to FY 2012 is less than 800 discharges annually.
For these fiscal years, the number of discharges is determined based on
total discharges, which includes discharges of both Medicare and non-
Medicare patients. However, under sections 3125 and 10314 of Public Law
111-148, for FYs 2011 and 2012, the discharge requirement has been
increased to less than 1,600 discharges of individuals ``entitled to,
or enrolled for, benefits under Part A during the fiscal year.''
Section 226(a) of the Act (42 U.S.C. 426(a)) provides that an
individual is automatically ``entitled'' to Medicare Part A when the
person reaches age 65 or becomes disabled, provided that the individual
is entitled to Social Security benefits under section 202 of the Act
(42 U.S.C. 402). Once a person becomes entitled to Medicare Part A, the
individual does not lose such entitlement simply because there is no
Part A coverage of a specific inpatient stay. For example, a patient
does not lose entitlement to Medicare Part A simply because the
individual's Part A hospital benefits have been exhausted; other items
and services (for example, skilled nursing services) still might be
covered under Part A, and the patient would qualify for an additional
90 days of Part A hospital benefits if at least 60 days elapsed between
the individual's first and second hospital stay. (See Sec. 409.60(a)
and (b)(1) and Sec. 409.61(a)(1) and (c).)
In addition, beneficiaries who are enrolled in Medicare Advantage
(MA) plans provided under Medicare Part C continue to meet all of the
statutory criteria for entitlement to Part A benefits under section
226. First, in order to enroll in Medicare Part C, a beneficiary must
be ``entitled to benefits under Part A and enrolled under Part B,'' see
section 1852(a)(1)(B)(i) of the Act. There is nothing in the Act that
suggests beneficiaries who enroll in Part C plan forfeit their
entitlement to Part A benefits. Second, once a beneficiary enrolls in
Part C, the MA plan must provide the beneficiary with the benefits to
which the enrollee is entitled under Medicare Part A, even though it
may also provide for additional supplemental benefits. See section
1852(a)(1)(A) of the Act. Third, under certain circumstances, Medicare
Part A pays for care furnished to patients enrolled in Part C plans.
For example, if, during the course of the year, the scope of benefits
provided under Medicare Part A expands beyond a certain cost threshold
due to Congressional action or a national coverage determination,
Medicare Part A will pay the provider for the cost of the services
directly. (See section 1852(a)(5) of the Act.) Similarly, Medicare Part
A also pays for Federally qualified health center services and hospice
care furnished to MA patients. See 42 U.S.C. section 1853(a)(4), (h)(2)
of the Act. Thus, a patient enrolled in a Part C plan remains entitled
to benefits under Medicare Part A.
Accordingly, for purposes of determining the number of discharges
for ``individuals entitled to, or enrolled for, benefits under Part
A,'' we propose to include all discharges associated with individuals
entitled to Part A, including discharges associated with individuals
whose inpatient benefits are exhausted or whose stay was not covered by
Medicare and discharges of individuals enrolled in an MA plan under
Medicare Part C. Since a hospital may only qualify for this adjustment
if the hospital has fewer than 1,600 discharges for patients entitled
to Part A, the

[[Page 30925]]

hospital must submit a claim to Medicare on behalf of all Part A
entitled individuals, including a no-pay claim for patients who are
enrolled in Part C, in order for Medicare to assure that these
discharges are included in the determination of whether the hospital
has fewer than 1,600 discharges for patients entitled to Part A.
Currently, a prior cost reporting period is used to determine if
the hospital meets the discharge criteria to receive the low-volume
payment adjustment in the current year.
Finally, sections 3125(4) of Public Law 111-148 and 10314(2), add a
new section 1886(d)(12)(D) of the Act that modifies the methodology for
calculation of the payment adjustment under section 1886(d)(12)(A) of
the Act for low-volume hospitals for discharges occurring in FYs 2011
and 2012. Currently, sections 1886(d)(12)(A) and (B) of the Act require
the Secretary to determine an applicable percentage increase for low-
volume hospitals based on the ``empirical relationship'' between ``the
standardized cost-per-case for such hospitals and the total number of
discharges of such hospitals and the amount of the additional
incremental costs (if any) that are associated with such number of
discharges.'' The statute thus mandates the Secretary to develop an
empirically justifiable adjustment based on the relationship between
costs and discharges for these low-volume hospitals. The statute also
limits the adjustment to no more than 25 percent. Based on analyses, we
conducted for the FY 2005 IPPS final rule (69 FR 49099 through 49102)
and the FY 2006 IPPS final rule (70 FR 47432 through 47434), a 25
percent low-volume adjustment to all qualifying hospitals with less
than 200 discharges was found to be most consistent with the statutory
requirement to provide relief to low-volume hospitals where there is
empirical evidence that higher incremental costs are associated with
low numbers of total discharges. However, section 1886(d)(12)(D) of the
Act, provides that for discharges occurring in FYs 2011 and 2012, the
Secretary shall determine the applicable percentage increase using a
continuous, linear sliding scale ranging from an additional 25 percent
payment adjustment for hospitals with 200 or fewer Medicare discharges
to 0 percent additional payment for hospitals with more than 1,600
Medicare discharges. We propose to apply this payment adjustment based
on increments of 100 discharges (beginning with 200 or fewer
discharges), with the applicable percentage increase decreasing
linearly in equal amounts by 1.6667 percent for every additional 100
Medicare discharges, with no payment adjustment for hospitals with more
than 1,599 Medicare discharges. We have not proposed an adjustment for
a hospital with exactly 1,600 discharges since, as specified in statute
at section 1886(d)(12)(C)(i) of the Act, as amended, a hospital must
have ``less'' than 1,600 discharges in order to qualify as a low volume
hospital. The proposed payment adjustment would be as determined below:

--
------------------------------------------------------------------------
Payment
adjustment
Medicare discharge range (percent add-
on)
------------------------------------------------------------------------
1-200..................................................... 25.0000
201-300................................................... 23.3333
301-400................................................... 21.6667
401-500................................................... 20.0000
501-600................................................... 18.3333
601-700................................................... 16.6667
701-800................................................... 15.0000
801-900................................................... 13.3333
901-1000.................................................. 11.6667
1001-1100................................................. 10.0000
1101-1200................................................. 8.3333
1201-1300................................................. 6.6667
1301-1400................................................. 5.0000
1401-1500................................................. 3.3333
1501-1599................................................. 1.6667
1600 or more.............................................. 0.0000
------------------------------------------------------------------------

While we are proposing to revise the qualifying criteria and the
payment adjustment for low-volume hospitals for FYs 2011 and 2012,
consistent with the amendments made by the Affordable Care Act, we note
that we are not proposing to modify the process for requesting and
obtaining the low-volume hospital payment adjustment. In order to
qualify, a hospital must provide to its FI or MAC sufficient evidence
to document that it meets the number of Medicare discharges and
distance requirements. The FI or MAC will determine, based on the most
recent data available, if the hospital qualifies as a low-volume
hospital, so that the hospital will know in advance whether or not it
will receive a payment adjustment and, if so, the add-on percentage.
The FI or MAC and CMS may review available data, in addition to the
data the hospital submits with its request for low-volume status, in
order to determine whether or not the hospital meets the qualifying
criteria.
We also note that as compared to the existing methodology for
determining the payment adjustment for low-volume hospitals, no
hospital would receive a lower payment adjustment under our proposed
methodology for FYs 2011 and 2012. Although the statute specifies that,
for years other than FYs 2011 and 2012, a hospital is a low-volume
hospital if it has less than 800 discharges, currently only hospitals
with fewer than 200 discharges receive a payment adjustment, an
additional 25 percent, because the statute requires that the adjustment
be empirically based to provide relief to low-volume hospitals where
there is empirical evidence that higher incremental costs are
associated with low numbers of total discharges. Consistent with
section 1886(d)(12)(D) of the Act, for FYs 2011 and 2012, we will
continue to pay hospitals with fewer than 200 discharges a payment
adjustment amount equal to an additional 25 percent.
We are proposing to revise our regulations at 42 CFR 412.101 to
reflect our proposal outlined above.
Currently, 42 CFR 412.101(a)(3) states that ``The fiscal
intermediary makes the determination of the discharge count for
purposes of determining a hospital's qualification for the adjustment
based on the hospital's most recent submitted cost report.'' This may
mistakenly be interpreted to mean that once a hospital qualifies as a
low-volume hospital, no further qualification is needed. We, therefore,
are proposing to clarify that a hospital must continue to qualify as a
low-volume hospital in order to receive the payment adjustment in that
year; that is, it is not based on a one-time qualification.

D. Medicare-Dependent, Small Rural Hospitals (MDHs) (Sec. 412.108)

1. Background
Medicare-dependent, small rural hospitals (MDHs) are eligible for
the higher of the Federal rate for their inpatient hospital services or
a blended rate based in part on the Federal rate and in part on the
MDH's hospital-specific rate. Section 1886(d)(5)(G)(iv) of the Act
defines an MDH as a hospital that is located in a rural area, has not
more than 100 beds, is not an SCH, and has a high percentage of
Medicare discharges (that is, not less than 60 percent of its inpatient
days or discharges either in its 1987 cost reporting year or in two of
its most recent three settled Medicare cost reporting years). The
regulations that set forth the criteria that a hospital must meet to be
classified as an MDH are at 42 CFR 412.108.
Although MDHs are paid under an adjusted payment methodology, they
are still IPPS hospitals paid under section 1886(d) of the Act. Like
all IPPS hospitals paid under section 1886(d) of the Act, MDHs are paid
for their discharges based on the DRG weights

[[Page 30926]]

calculated under section 1886(d)(4) of the Act.
Through and including FY 2006, under section 1886(d)(5)(G) of the
Act, MDHs are paid based on the Federal rate or, if higher, the Federal
rate plus 50 percent of the amount by which the Federal rate is
exceeded by the updated hospital-specific rate based on the hospital's
FY 1982 or FY 1987 costs per discharge, whichever of these hospital-
specific rates is higher. Section 5003(b) of Public Law 109-171 (DRA
2005) amended section 1886(d)(5)(G) of the Act to provide that, for
discharges occurring on or after October 1, 2006, MDHs are paid based
on the Federal rate or, if higher, the Federal rate plus 75 percent of
the amount by which the Federal rate is exceeded by the updated
hospital-specific rate based on the hospital's FY 1982, FY 1987, or FY
2002 costs per discharge, whichever of these hospital-specific rates is
highest.
For each cost reporting period, the fiscal intermediary or MAC
determines which of the payment options will yield the highest
aggregate payment. Interim payments are automatically made at the
highest rate using the best data available at the time the fiscal
intermediary or MAC makes the determination. However, it may not be
possible for the fiscal intermediary or MAC to determine in advance
precisely which of the rates will yield the highest aggregate payment
by year's end. In many instances, it is not possible to forecast the
outlier payments, the amount of the DSH adjustment or the IME
adjustment, all of which are applicable only to payments based on the
Federal rate and not to payments based on the hospital-specific rate.
The fiscal intermediary or MAC makes a final adjustment at the
settlement of the cost report after it determines precisely which of
the payment rates would yield the highest aggregate payment to the
hospital.
If a hospital disagrees with the fiscal intermediary's or the MAC's
determination regarding the final amount of program payment to which it
is entitled, it has the right to appeal the determination in accordance
with the procedures set forth in 42 CFR Part 405, Subpart R, which
govern provider payment determinations and appeals.
2. Extension of the MDH Program
Section 3124 of Public Law 111-148 extends the MDH program, from
the end of FY 2011 (that is, for discharges before October 1, 2011) to
the end of FY 2012 (that is, for discharges before October 1, 2012).
Under prior law, as specified in section 5003(a) of Public Law 109-171
(DRA of 2005), the MDH program was to be in effect through the end of
FY 2011 only. Section 3124 (a) of Public Law 111-148 amends sections
1886(d)(5)(G)(i) and (ii)(II) of the Act to extend the MDH program and
payment methodology from the end of FY 2011 to the end of FY 2012, by
``striking ``October 1, 2011'' and inserting ``October 1, 2012''.''
Section 3125(b) of Public Law 111-148 also makes conforming amendments
to sections 1886(b)(3)(D)(i) and (iv) of the Act. Section 3124(b)(2) of
Public Law 111-148 also amends section 13501(e)(2) of OBRA 1993 (42
U.S.C. 1395ww note) to extend the provision permitting hospitals to
decline reclassification as an MDH through FY 2012.

E. Additional Payments for Qualifying Hospitals With Lowest Per Capita
Medicare Spending

1. Background
Section 1109 of Public Law 111-152, provides for additional
payments for FY 2011 and 2012 for ``qualifying hospitals.'' Section
1109(d) defines a ``qualifying hospital'' as a ``subsection (d)
hospital * * * that is located in a county that ranks, based upon its
ranking in age, sex and race adjusted spending for benefits under parts
A and B * * * per enrollee within the lowest quartile of such counties
in the United States.'' Therefore, a ``qualifying hospital'' is one
that meets the following conditions: (1) A ``subsection (d) hospital''
as defined in section 1886(d)(1)(B) of the Act; and (2) located in a
county that ranks within the lowest quartile of counties based upon its
spending for benefits under Medicare Part A and Part B per enrollee
adjusted for age, sex, and race. Section 1109(b) of Public Law 111-152
makes available $400 million to qualifying hospitals for FY 2011 and FY
2012. Section 1109(c) of Public Law 111-152 requires the $400 million
to be divided among each qualifying hospital in proportion to the ratio
of the individual qualifying hospital's FY 2009 IPPS operating hospital
payments to the sum of total FY 2009 IPPS operating hospital payments
made to all qualifying hospitals.
2. Eligible Counties
Section 1109 of Public Law 111-152 provides $400 million for FYs
2011 and 2012 for supplemental payments to qualifying hospitals located
in counties that rank within the lowest quartile of counties in the
United States for spending for benefits under Medicare Part A and Part
B. The provision requires that the Medicare Part A and Part B county-
level spending per enrollee to be adjusted by age, sex and race. We are
proposing our methodology for determining the bottom quartile of
counties with the lowest Medicare Part A and Part B spending adjusted
by age, sex, and race and invite public comment on the methodology we
propose to use to adjust for age, sex, and race described below. We
further propose that we will determine this bottom quartile of counties
one time in the FY 2011 IPPS/RY 2011 LTCH PPS final rule for the
purpose of disbursing the $400 million as required by section 1109 of
Public Law 111-152.
We developed an adjustment model by age, sex, and race, as required
under the provision. We then applied this adjustment to the county
Medicare Part A and Part B spending data to account for the
demographics of the Medicare beneficiaries in those counties. After
those adjustments are applied, we determined the Medicare Part A and
Part B spending by county per enrollee. Our proposed methodology to
determine the Medicare Part A and Part B spending per enrollee by
county adjusted for age, sex, and race is similar to how we calculate
risk adjustment models for Medicare Advantage (MA) ratesetting. Risk
adjustment for MA ratesetting is discussed in the annual announcement
of calendar year MA capitation rates and MA and Part D payment
policies. For more information on the methodology for risk adjustment
used for MA ratesetting, we refer readers to the CMS Web site where we
announce MA rates through our 45-day notice (http://www.cms.gov/MedicareAdvtgSpecRateStats/Downloads/Announcement2010.pdf).
a. Development of Risk Adjustment Model
As required by section 1109(d) of Public Law 111-152, we are
proposing a risk adjustment model that accounts for differentials in
Medicare spending by age, sex, and race. Consistent with how we develop
our risk adjustment models for MA ratesetting as described above, we
developed a prospective risk adjustment model using 2006 data for
beneficiary characteristics and 2007 data for Part A and Part B
spending. However, unlike the risk adjustment mode used for MA which
includes diseases and demographic factors, the only independent
variables or prospective factors in the model for payments under
section 1109 of Public Law 111-152 are age, sex and race, as required
by the provision. The dependent variable was annualized Medicare Part A
and B spending at the beneficiary level for 2007 as it is the most
recent and complete data available. The categorization of age, sex, and
race variables are described below.

[[Page 30927]]

The age, sex, race (ASR) model(s) was estimated using the Five
Percent Standard Analytic Denominator file, a standard 5-percent sample
from the 2007 Denominator file which is also used to estimate CMS risk
adjustment models for payment to MA organizations. We chose to use Five
Percent Standard Analytic Denominator file from 2007 in order to
optimize the amount of time after the timely claim submission deadlines
and the latest available data; in other words because it is most
complete data currently available. This file has the demographic and
enrollment characteristics of all Medicare beneficiaries. The
Denominator File is an abbreviated file of the Enrollment Data Base
(EDB). The Denominator File contains data on all Medicare beneficiaries
enrolled and/or entitled to be enrolled in Medicare in a given year
while the EDB is the source of enrollment and entitlement information
for all people who are or were ever entitled to Medicare. The model was
estimated using all beneficiaries residing in the community and long-
term institutions. The sample had 1,603,998 beneficiaries.
The Denominator File contains a sex variable where the
beneficiaries can identify themselves as male or female. The file also
contains an age variable which is defined as the beneficiary's age at
the end of the prior year. Beneficiaries with an age greater than 98
are coded as age 98. The race demographic variable in the Denominator
File is populated by data from the Social Security Administration
(SSA). The SSA's data for this race demographic variable are collected
on form SS-5. Prior to 1980, the SS-5 form included 3 categories for
race: White, Black or Other. Since that time, Form SS-5 instructed a
beneficiary to voluntarily select one of the following 5 categories:
(1) Asian, Asian-American or Pacific Islander; (2) Hispanic; (3) Black
(Not Hispanic); (4) North American Indian or Alaskan Native; and (5)
White (Not Hispanic). Form SS-5 is completed when an individual does
the following: (1) Applies for a social security number; (2) requests a
replacement of the social security card; or (3) requests changes to
personal information on their record such as a name change. (Social
Security Administration Web site instructions http://ssa.gov/online/ss-5.pdf). Each January, CMS obtains data from SSA to update the EDB for
beneficiaries who were added during the previous calendar year as well
as all living beneficiaries whose race is identified as ``Other'' or
``Unknown.''
Discussed in the context of the ESRD payment system in the ESRD
proposed rule on September 29, 2009 (74 FR 49962), we noted concerns
with using the EDB as a data source due to missing data, and that
racial and ethnic categories are not well defined. However, we believe
that the current EDB, particularly with respect to the more recent and
ongoing updates we perform, remains a useful source of race and
ethnicity data on 46 million Medicare beneficiaries. Additionally,
because this is our only currently available data source on the racial
and ethnic demographics of Medicare beneficiaries, we propose to use
the EDB as our data source for beneficiary race so that we can fulfill
the requirements of section 1109(d) of Public Law 111-152 to adjust
county Medicare Part A and Part B spending by race.
We used the MedPAR claims file as the source to determine Medicare
inpatient spending. We used the National Claims History File to
determine spending on DMEPOS and supplies. The other spending under
Medicare Part A and Part B was determined using the Standard Analytic
File. The Standard Analytic File and MedPAR claims file are subsets of
the National Claims History File. These data files are also used in the
MA ratesetting process and are our data source for Medicare spending
stored at the beneficiary level.
In order to determine annual spending (the dependent variable in
the risk adjustment model), we annualized the Medicare Part A and Part
B spending for beneficiaries with less than a full year of eligibility,
and these amounts were weighted in the analysis by the fraction of the
year they were in the data.
We used a linear regression model to determine the demographic
adjustments. This is consistent with how we model our risk adjustment
for the MA rates. The linear regression used 24 age-sex regression
categories, 12 age categories each for males and females. The age
categories are as follows; 0-34, 35-44, 45-49, 50-54, 55-59, 60-64, 65-
69, 70-74, 75-79, 80-84, 85-89, and 90+. The age-sex coefficients
displayed in the table below reflect the difference in Medicare Part A
and Part B spending per enrollee in those age-sex categories relative
to national average Part A and Part B spending based on our linear
regression model.
In addition, we used the same linear regression model to determine
how to adjust Medicare Part A and Part B spending for race. In addition
to the age-sex regression categories described above, we included
variables to adjust for race. We considered two methods to adjust for
race in county spending because of the way that the SS-5 form collects
race information, which is then reported in the same format in the EDB.
As discussed earlier, the EDB currently categorizes race by the
following five categories, as reported by the Medicare beneficiary: (1)
Asian, Asian-American or Pacific Islander; (2) Hispanic; (3) Black (Not
Hispanic); (4) North American Indian or Alaskan Native; and (5) White
(Not Hispanic). One method categorized race by White, Black, Hispanic,
and Other (WBHO). The ``Other'' category includes Asian/Pacific
Islander, American Indian/Alaska Native, and all others. The second
method categorized race by White, Black, and Other (WBO), where
beneficiaries who identified themselves as Hispanic were categorized as
Other. The race/ethnicity categories are mutually exclusive; if a
beneficiary identified themselves as Hispanic he or she was not further
classified as another category, such as White or Black. In our
regression modeling we used the largest group, White, as the reference
group; the coefficients on the difference in spending by race,
displayed in the table below, are additive to the reference group. In
other words, the coefficients for each race category represent the
difference in predicted Medicare Part A and Part B spending relative to
our reference group. Where the coefficients are positive, this implies
that the predicted spending for that category is higher than that of
the reference group. Conversely, where the coefficients are negative,
this implies that the predicted spending for that category is lower
than that of the reference group.
Below are two tables representing the coefficients used to adjust
Medicare Part A and Part B spending by county. The first table shows
the coefficients for each age and sex category. The second table shows
the coefficients for race. These national coefficients are applied to
each counties' relative demographic for age, sex and race, so that each
county has a risk score by age, sex and race.

[[Page 30928]]

--------------------------------------------------------------------------------------------------------------------------------------------------------
Age categories (in years)
---------------------------------------------------------------------------------------------------------------------------
Sex Greater
0-34 35-44 45-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 than 95
--------------------------------------------------------------------------------------------------------------------------------------------------------
Female...................... 0.67896 0.80089 0.96917 1.09810 1.18855 0.67358 0.83818 1.01599 1.189727 1.364575 1.475495 1.366515
Male........................ 0.52664 0.70067 0.82262 0.93750 1.03792 0.71932 0.90896 1.11809 1.32812 1.50008 1.68184 1.77046
--------------------------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------
Race Coefficient
------------------------------------------------------------------------
White.................................... Baseline.
Black.................................... 0.17667.
Hispanic................................. 0.229.
Other.................................... -0.110.
------------------------------------------------------------------------

We are proposing to adjust for race using the WBHO method where we
separately account for cost differences associated with Hispanic
beneficiaries. The Office of Management and Budget (OMB) has
promulgated standards for the classification of Federal data on race
and ethnicity. Under OMB's classification standards, the category of
Hispanic is treated as an ethnic category as opposed to a race
category. The current OMB Standards of 1997 require collection of
specific demographic data using a total of five race categories, plus
other (62 FR 58782 through 58790). The five race categories are--(1)
American Indian or Alaska Native; (2) Asian; (3) Black or African
American; (4) Native Hawaiian or Other Pacific Islander; and (5) White.
In addition, OMB specified two separate ethnic categories--Hispanic or
Latino, and not Hispanic or Latino. However, as explained above,
Hispanic or Latino ethnicity is treated as a race category by EDB, and
beneficiaries can self-identify as Hispanic among mutually exclusive
racial categories. Despite the inconsistency in reporting by the OMB
and the EDB, we propose to treat the category of Hispanic as a separate
category for purposes of the race adjustment required by section 1109
of Public Law 111-152. We found that the coefficient for the Hispanic
category is statistically significant, suggesting that Medicare Part A
and Part B spending associated with this category of beneficiaries is
different from the spending for our reference group and that it should
be a separate coefficient to adjust county spending. In addition, the
EDB treats Hispanic as a separate racial classification, consistent
with our WBHO method, therefore; we believe that our proposal
appropriately interprets the required race adjustment. Therefore, we
propose to adjust for race using the WBHO method.
For purposes of this supplemental proposed rule, we also adjusted
county spending using the WBO methodology to compare the two
approaches. We found minimal difference in the county rankings under
the two methodologies. We found that some counties would qualify as an
eligible county only under the WBO methodology, and others would no
longer qualify as an eligible county using this alternative. The
decision to use the WBHO methodology affects whether 9 subsection (d)
hospitals, located in 5 counties, would be eligible to receive a
payment under section 1109. In Table 3, we publish the differences in
counties, eligible hospitals, and payments by State under the two
methodologies. This is the first time we have developed an adjustment
for Medicare spending based on race, and we welcome public comment on
our proposal to use the WBHO methodology to adjust for race as required
by section 1109 of Public Law 111-152. We also welcome public comment
on the WBO methodology to adjust for race though we note that we are
not proposing this methodology at this time.
b. Calculation of County Level Part A and Part B Spending
In order to rank counties by Medicare Part A and B spending, we
first calculated Medicare Part A and Part B county level spending for
each county in the 50 States and the District of Columbia using a
similar methodology used to establish county level FFS rates for MA
payments. Using a 5 year average of each county's actual spending (from
2002 to 2006), CMS's Office of the Actuary calculated an average
geographic adjuster (AGA), which reflects the county's expenditure
relative to the national expenditure. We believe a 5-year average is
appropriate, as it accounts for fluctuations in year-to-year
expenditures, which could distort the counties' historic level of
spending and is consistent with how MA rates are calculated. The AGA
was then applied to the 2009 United States Per Capita Cost estimate
(USPCC), which is the national average cost per Medicare beneficiary,
to determine 2009 Medicare Part A and Part B spending for each county.
We welcome public comment on this methodology to calculate county-level
Part A and Part B spending.
3. Application of the Age/Sex/Race Adjustment to Part A and Part B
County Spending
To estimate the county level risk scores for 2009, beneficiary
enrollment information was first extracted from the EDB. We chose to
calculate Medicare Part A and Part B county spending for 2009 to be
consistent with how we are required to determine qualifying hospitals'
payment amounts, under section 1109(c) of Public Law 111-152. That is,
section 1109(c) of Public Law 111-152 requires that qualifying
hospitals located in the bottom quartile of counties with the lowest
Medicare Part and Part B spending per enrollee will receive a portion
of the allotted $400 million based on their FY 2009 operating payments.
Therefore, we propose to calculate Medicare Part A and Part B County
spending for 2009 as well. We only include beneficiaries enrolled in
Medicare Part A and/or Part B, consistent with the language of section
1109(d) of Public Law 111-152, which refers to spending under Part A
and B. Based on these criteria, there were 30,666,295 beneficiaries
included in the adjustment process. To determine the age, sex and race
make-up of the Part A and/or Part B beneficiaries for each county, we
used the EDB to identify date of birth, sex, race, and State/county of
residence to create a person level file with the data needed to run the
ASR model.
A county level average risk score was developed for each county in
the United States by applying the ASR model to each individual in the
county enrolled in Medicare Part A and/or Part B, summing the resulting
risk scores and dividing by the number of beneficiaries by county
enrolled in Medicare Part A and/or Part B. The county level Medicare
Part A and or Part B spending was adjusted by dividing the county level
Medicare Part A and/or Part B spending by the county level average risk
score. The resulting spending distribution was then sorted lowest to
highest dollars the 786 counties in the lowest quartile of spending
(that is, lowest adjusted spending per enrollee) were determined to be
eligible counties under section 1109 of Public Law 111-152.
We invite comment on our methodology for determining the age, sex,
race adjustments for determining adjusted Medicare Part A and B
spending by county for the purpose of determining eligible counties
under section 1109 of Public Law 111-152.

[[Page 30929]]

3. Qualifying Hospitals and Annual Payment Amounts
We have developed a methodology to identify the qualifying
hospitals located in our list of eligible counties. Consistent with
section 1109(d) of Public Law 111-152, a qualifying hospital is a
``subsection (d) hospital'' (as defined for purposes of section 1886(d)
of the Act) that is ``located in'' an eligible county (as identified
using the methodology proposed in section B). A subsection (d) hospital
is defined in section 1886(d)(1)(B) of the Act in part as a ``hospital
located in one of the fifty States or the District of Columbia''. The
term ``subsection (d) hospital'' does not include hospitals located in
the territories or hospitals located in Puerto Rico. Section
1886(d)(9)(A) of the Act separately defines a ``subsection (d) Puerto
Rico hospital'' as a hospital that is located in Puerto Rico and that
``would be a subsection (d) hospital * * * if it were located in one of
the 50 States.'' Therefore, Puerto Rico hospitals are not eligible for
these additional payments. Indian Health Services hospitals enrolled as
a Medicare provider meet the definition of a subsection(d) hospital and
can qualify to receive this payment if they are located in an eligible
county. In addition, hospitals that are MDHs and sole community
hospitals (SCHs), though they can be paid under a hospital-specific
rate instead of under the Federal standardized amount under the IPPS,
are ``subsection (d)'' hospitals. The statutory definition of a
``subsection (d)'' hospital in section 1886(d)(1)(B) of the Act
specifically excludes hospitals and hospital units excluded from the
IPPS, such as psychiatric, rehabilitation, long term care, children's,
and cancer hospitals. In addition, critical access hospitals (CAHs) are
not considered qualifying hospitals because they do not meet the
definition of a ``subsection (d) hospital'' as they are paid under
section 1814(l) of the Act. CAHs are not paid under the IPPS; rather
they are paid under a reasonable cost methodology, so they do not meet
the definition of ``qualifying hospital'' under section 1109(d) of
Public Law 111-152.
For the purposes of section 1109 of Public Law 111-152, we are
proposing to identify ``qualifying hospitals'' based on their Medicare
Provider number or Centers for Medicare and Medicaid Services
Certification Number (CCN), because this is also how hospitals identify
themselves when they file their Medicare cost reports. We also propose
that in order to meet the definition of a ``qualifying hospital'', the
facility, as identified by the Medicare Provider Number or CCN, must:
(1) Have existed as a subsection (d) hospital as of April 1, 2010; (2)
be geographically located in an eligible county; and (3) have received
IPPS operating payments (in accordance with section 1886(d)) of the Act
under their Medicare provider number in FY 2009. We used the Online
Survey, Certification and Reporting (OSCAR) database to determine a
hospital's county location associated with that CCN provider number.
County data in OSCAR is supplied by the U.S Postal Service and is cross
walked to the address reported by the provider. Under this proposal,
the address listed for a hospital's Medicare provider number must be
currently located in a qualifying county in order for a hospital to
meet the definition of ``qualifying hospital.''
We have published a list of the qualifying IPPS hospitals that we
have identified based on the factors described above in Table 3. We
invite comment on our methodology for identifying qualifying hospitals.
We also invite comment on whether our list is accurate and whether any
providers are missing from this list using the methodology described
above.
4. Payment Determination and Distribution
As mentioned above, under section 1109(b), the total pool of
payments available to qualifying hospitals for FY 2011 and FY 2012 is
$400 million. The statute is not specific as to the timing of these
payments. Since Congress has allocated a set amount--$400 million--for
hospitals for FYs 2011 and 2012 under this provision, we believe it is
consistent with the statute to spread these payments over the 2-year
period. We are proposing to distribute $150 million for FY 2011 and
$250 million for FY 2012. Because this is a new policy, we are
proposing to distribute a smaller amount of money for the first year
($150 million for FY 2011 and $250 million for FY 2012) so that the
public will have an opportunity to review our proposal and finalized
policy in the FY 2011 IPPS/LTCH PPS final rule, and notify us of any
possible revisions to the list of qualifying hospitals, so that we can
adjust payments for FY 2012. This will ensure that we correctly
identify qualifying hospitals and their proper payment amounts without
exceeding the program's funding. We invite public comment to give
hospitals the opportunity to request that we make changes to the
qualifying hospital list in order to ensure the accuracy of the
qualifying hospital list based on the methodology set forth in the
final rule. However, we are proposing to identify eligible counties,
qualifying hospitals and their payment amounts under section 1109 of
Public Law 111-152 only once. Because Congress has allocated a specific
amount of money, we are proposing to identify eligible counties,
qualifying hospitals and their payment amounts once in order to ensure
we do not exceed the fixed amount of money and to ensure predictability
of payments.
We propose to distribute payments through the individual hospital's
Medicare contractor through an annual one-time payment during each of
FY 2011 and FY 2012. We believe that annual payments made by the FI or
A/B MACs would be an expeditious way to give the qualifying hospitals
the money allotted under section 1109 of Public Law 111-152.
Alternatively, these payments could be distributed to qualifying
hospitals at the time of cost report settlement for the qualifying
providers' fiscal year end FY 2011 and FY 2012 cost reports. However,
cost report settlement typically takes several years beyond a
hospital's fiscal year end. If we distributed these additional payments
at the time of cost report settlement, it may take several years until
hospitals receive these additional payments. Therefore, we believe our
proposal to give hospitals their section 1109 payments as annual
payments during FY 2011 and FY 2012 presents the most expedient method
to distribute these payments to hospitals, and is in the spirit of the
intent of Congress. We welcome public comment on our proposal to
distribute $150 million in FY 2011 and $250 million in FY 2012 through
an annual payment in each of those years made to the qualifying
providers through their FI or A/B MAC.
We propose that qualifying hospitals report these additional
payments on their Medicare hospital cost report corresponding to the
appropriate cost reporting period that the hospitals have received the
payments. On the Medicare Hospital Cost report, Form 2552 has an
``other adjustment'' line on Worksheet E, Part A that can used by
hospitals to report the payments received under section 1109 of Public
Law 111-152. We plan to issue additional cost reporting instructions
for qualifying hospitals to report these additional payments on a
subscripted line of the ``other adjustment'' line to identify this
payment. We note that we are requiring these payments be reported on
the cost report for tracking purposes only; these additional payments
will not be adjusted or settled by the FI or A/B MAC on the cost
report.

[[Page 30930]]

5. Hospital Weighting Factors
Section 1109(c) of Public Law 111-152 requires that the payment
amount for a qualifying hospital shall be determined ``in proportion to
the portion of the amount of the aggregate payments under section
1886(d) of the Social Security Act to the hospital for fiscal year 2009
bears to the sum of all such payments to all qualifying hospitals for
such fiscal year.'' We are proposing that the portion of a hospital's
payment under section 1109 is based on the proportion of their IPPS
operating payments made in FY 2009 relative to the total IPPS operating
payments made to all qualifying hospitals in FY 2009. These FY 2009
IPPS operating payments made under section 1886(d) include DRG and wage
adjusted payments made under the IPPS standardized amount with add-on
payments for operating DSH, operating IME, operating outliers and new
technology (collectively referred to in this proposed rule as the IPPS
operating payment amount). We are proposing to include IME MA payments
made to IPPS hospitals because these payments are made under section
1886(d) of the Act. Under 42 CFR 412.105(g) of the regulations and as
implemented in Transmittal A-98-21 (Change Request 332), hospitals that
are paid under the IPPS and train residents in approved GME programs
may submit claims associated with MA enrollees to the FI/MAC for the
purpose of receiving an IME payment. No IPPS operating payment or other
add-on payment is made for these MA enrollees. This is consistent with
how the IPPS includes these IME MA payments when adjusting for budget
neutrality of the IPPS standardized amounts.
In addition, we are including in the FY 2009 IPPS operating payment
amount beneficiary liabilities (coinsurance, copayments, and
deductibles) because the payments made under section 1886(d) of the Act
``are subject to the provisions of section 1813.'' That is, the payment
received by the hospital includes the amount paid by Medicare, as well
as the amount for which the beneficiary is responsible, as set forth in
section 1813 of the Act. We propose to exclude IPPS capital payments
because they are payments made under section 1886(g) of the Act. We
also propose to exclude payments for organ acquisition costs because it
is a payment made under section 1881(d) of the Act and we propose to
exclude payments for blood clotting factor because they are payments
made under section 1886(a)(4) of the Act.
Consistent with our IPPS ratesetting process, we are proposing to
use the FY 2009 MedPAR inpatient claims data to determine the FY 2009
IPPS operating payments amount made to qualifying hospitals in order to
set the ratio for determining a qualifying hospital's share of the $400
million payment under section 1109 of Public Law 111-152. Though these
claim payments may be later changed and adjusted at cost report
settlement, this settlement generally occurs after FY 2011 and FY 2012.
Furthermore, we believe that use of the FY 2009 MedPAR inpatient claims
data is consistent with our proposal to make the payments under section
1109 of Public Law 111-152 in two annual payments in FY 2011 and 2012
instead of waiting for cost report settlement. Furthermore, we use
MedPAR data in other areas of the IPPS, including calculating IPPS
relative weights, budget neutrality factors, outlier thresholds and the
standardized amount. The FY 2009 MedPAR data can be ordered to allow
the public to verify qualifying hospitals' FY 2009 IPPS operating
payments. Interested individuals may order these files through the Web
site at: http://www.cms.hhs.gov/LimitedDataSets/ by clicking on MedPAR
Limited Data Set (LDS)-Hospital (National). This Web page describes the
file and provides directions and further detailed instructions for how
to order.
Persons placing an order must send the following: a Letter of
Request, the LDS Data Use Agreement and Research Protocol (refer to the
Web site for further instructions), the LDS Form, and a check for
$3,655 to:

Mailing address if using the U.S. Postal Service: Centers for Medicare
& Medicaid Services, RDDC Account, Accounting Division, P.O. Box 7520,
Baltimore, MD 21207-0520.

Mailing address if using express mail: Centers for Medicare & Medicaid
Services, OFM/Division of Accounting--RDDC, Mailstop C3-07-11, 7500
Security Boulevard, Baltimore, MD 21244-1850.

For this proposed rule, we used the December 2009 update to the FY
2009 MedPAR data (which is the latest available update to the file) to
determine the proposed qualifying hospitals' IPPS operating payment
amounts. For the FY 2011 IPPS/LTCH PPS final rule, we plan on using the
March 2010 update to the FY 2009 MedPAR data to determine qualifying
hospitals' IPPS operating payment amounts which will then be used to
set the hospital weighting factors for FYs 2011 and 2012
As discussed earlier in section II.E.3. of the preamble to this
supplemental proposed rule, qualifying hospitals can include SCHs and
MDHs as they meet the definition of subsection (d) hospitals. SCHs are
paid in the interim (prior to cost report settlement) on a claim by
claim basis at the amount that is the higher of the payment based on
the hospital-specific rate or the IPPS Federal rate based on the
standardized amount. At cost report settlement, the FI or A/B MAC
determines if the hospital would receive higher IPPS payments in the
aggregate using the hospitals specific rate (on all claims) or the
Federal rate (on all claims). The FI or A/B MAC then assigns the
hospital the higher payment amount (either the hospital specific rate
for all claims or the Federal rate amount for all claims) for the cost
reporting period. To determine the FY 2009 operating payment amount for
SCHs that meet the definition of a qualifying hospital, we propose to
use the IPPS operating payment made on the Medicare IPPS claim in the
FY 2009 MedPAR rather than the SCH's final payment rate that is
determined at cost report settlement. We believe this approach is
consistent with the treatment of other qualifying hospitals under our
proposal, and again allows for the timely distribution of funds in two
annual payments, as discussed above. MDHs are paid the sum of the
Federal payment amount plus 75 percent of the amount by which the
hospital specific rate exceeds the Federal payment amount. This amount
is considered their IPPS operating payment reported on their Medicare
IPPS claim.
In order to calculate payment amounts consistent with section
1109(c) of Public Law 111-152, we propose to use a weighting factor for
each qualifying hospital that is equal to the qualifying hospital's FY
2009 IPPS operating payment amount (as described above) divided by the
sum of FY 2009 IPPS operating payment amounts for all qualifying
hospitals. We believe this methodology is consistent with the
requirement of section 1109(c) of Public Law 111-152, because
qualifying hospitals with a larger proportion of operating payments
would have a proportionately higher weighting factor and would receive
the proportionately larger share of the $400 million, while hospitals
with a smaller proportion of operating payments would have
proportionately smaller weighting factor and would receive
proportionately smaller shares of the $400 million. We welcome public
comment on our methodology to determine the amount of money distributed
to qualifying hospitals consistent with the language

[[Page 30931]]

in section 1109(c) of Public Law 111-152.
6. Results
In calculating county-level Medicare Part A and B spending, we have
found that there are 3,144 counties in the United States. Therefore,
there are 786 counties that rank in the lowest quartile of counties
with regards to adjusted Medicare Part A and Part B spending per
beneficiary. We have listed the 786 eligible counties in Table 2. Of
those 786 eligible counties, there are only 276 counties in which
qualifying hospitals are located, using the methodology we proposed in
section II.E.3. of the preamble to this supplemental proposed rule.
Using Medicare provider numbers, as proposed above in section II.E.3.
of the preamble to this supplemental proposed rule, we have identified
415 IPPS hospitals that are currently located in those eligible
counties and received IPPS operating payments in FY 2009. We have
listed the qualifying IPPS provider numbers, their counties and their
weighting factors in Table 2. We invite public comment on our proposed
methodology for adjusting spending for age, sex, and race as well as
the alternative methodology discussed in section II.E.2.a. of the
preamble to this supplemental proposed rule. For these two
methodologies (WBHO and WBO), we list the number of eligible counties,
the number of eligible counties in which a qualifying hospital is
located, the payment amount, and the percentage of the total payment
under section 1109 of Public Law 111-152 by State in Table 3.
We invite public comment on the accuracy of the lists of eligible
counties, qualifying hospitals and qualifying hospitals' payment
weighting factors (based on the proposed methodologies described
above).
7. Finalization of Eligible Counties, Qualifying Hospitals and
Qualifying Hospitals' Weighting Factors
Based on public comments, it is possible that we will finalize a
methodology to determine the list of eligible counties and hospitals
that differs from our current proposal. A change in our methodology
could, in turn, result in changes to the list of eligible counties or
qualifying hospitals. We note again that we are proposing to identify
eligible counties, qualifying providers and their payments under
section 1109 of Public Law 111-152 only once in the FY 2011 IPPS/LTCH
PPS final rule. Based on this proposal, the methodology for determining
a final list of eligible counties would produce the actual list of
eligible counties that would be finalized in the FY 2011 IPPS final
rule and would not be updated in a future fiscal year based on updated
data.
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BILLING CODE 4120-01-C

F. Rural Community Hospital Demonstration Program

1. Background
Section 410A(a) of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA), Public Law 108-173, required the
Secretary to establish a demonstration program to test the feasibility
and advisability of establishing ``rural community hospitals'' to
furnish covered inpatient hospital services to Medicare beneficiaries.
The demonstration pays rural community hospitals for such services
under cost based methodology for Medicare payment purposes for covered
inpatient hospital services furnished to Medicare beneficiaries. A
rural community hospital, as defined in section 410A(f)(1) of MMA, is a
hospital that--
Is located in a rural area (as defined in section
1886(d)(2)(D) of the Act) or is treated as being located in a rural
area under section 1886(d)(8)(E) of the Act;
Has fewer than 51 beds (excluding beds in a distinct part
psychiatric or rehabilitation unit) as reported in its most recent cost
report;
Provides 24-hour emergency care services; and
Is not designated or eligible for designation as a CAH
under section 1820 of the Act.
Subsection 410A(a)(4) of the MMA, in conjunction with paragraphs
(2) and (3) of subsection 410A(a), provided that the Secretary was to
select for participation no more than 15 rural community hospitals in
rural areas of States that the Secretary identified as having low
population densities. Using 2002 data from the U.S Census Bureau, we
identified the 10 States with the lowest population density in which
rural community hospitals were to be located in order to participate in
the demonstration: Alaska, Idaho, Montana, Nebraska, Nevada, New
Mexico, North Dakota, South Dakota, Utah, and Wyoming. (Source: U.S.
Census Bureau, Statistical Abstract of the United States: 2003).
We originally solicited applicants for the demonstration in May
2004; 13 hospitals began participation with cost report years beginning
on or after October 1, 2004. (Four of these 13 hospitals withdrew from
the program and became CAHs). In a notice published in the Federal
Register on February 6, 2008 (73 FR 6971), we announced a solicitation
for up to 6 additional hospitals to participate in the demonstration
program. Four additional hospitals were selected to participate under
this solicitation. These four additional hospitals began under the
demonstration payment methodology with the hospital's first cost
reporting period starting on or after July 1, 2008. Three hospitals
(two of the hospitals were among the thirteen hospitals that were
original participants in the demonstration and one of the hospitals was
among the four hospitals that began the demonstration in 2008) withdrew
from the demonstration during CY 2009. (Two of these hospitals
indicated that they will be paid more for Medicare inpatient services
under the rebasing allowed under the SCH methodology allowed by the
Medicare Improvement for Patients and Providers Act of 2008 (Pub. L.
110-275). The other hospital restructured to become a CAH.) For
purposes of the analyses that follow in section II.F.3 of the preamble,
we make the assumption that there are 10 currently participating
hospitals (8 hospitals that are actively participating since the
initial demonstration period had not yet concluded for them at the time
of the passage of Public Law 111-148 and 2 hospitals that concluded the
demonstration in December 2009 upon the conclusion of their initial
demonstration period). For the 2 hospitals that concluded the
demonstration in December 2009, we assume that they will continue the
demonstration under the 5-year extension provided by Affordable Care
Act since they participated in their entire initial 5-year
demonstration period, which we believe indicates that those hospitals
favored the payment rate provided in the demonstration and will
continue to avail themselves of such reimbursement.
Section 410A(a)(5) of Public Law 108-173 required a 5-year
demonstration period of participation. Prior to the enactment of Public
Law 111-148, for the seven currently participating hospitals that began
the demonstration during FY 2005 (``originally participating
hospitals''), the demonstration was scheduled to end for each of these
hospitals on the last day of its cost reporting period that ends in FY
2010. The end of the participation for the three participating
hospitals that began the demonstration in CY 2008 was scheduled to be
September 30, 2010.
In addition, section 410A(c)(2) of Public Law 108-173 requires
that, ``[i]n conducting the demonstration program under this section,
the Secretary shall ensure that the aggregate payments made by the
Secretary do not exceed the amount which the Secretary would have paid
if the demonstration program under this section was not implemented.''
This requirement is commonly referred to as ``budget neutrality''.
Generally, when we implement a demonstration program on a budget
neutral basis, the demonstration program is budget neutral in its own
terms; in other words, the aggregate payments to the participating
hospitals do not exceed the amount that would be paid to those same
hospitals in the absence of the demonstration program. Typically, this
form of budget neutrality is viable when, by changing payments or
aligning incentives to improve overall efficiency, or both, a
demonstration program may reduce the use of some services or eliminate
the need for others, resulting in reduced expenditures for the
demonstration program's participants. These reduced expenditures offset
increased payments elsewhere under the demonstration program, thus
ensuring that the demonstration program as a whole is budget neutral or
yields savings. However, the small scale of this demonstration program,
in conjunction with the payment methodology, makes it extremely
unlikely that this demonstration program could be viable under the
usual form of budget neutrality. Specifically, cost-based payments to
participating small rural hospitals are likely to increase Medicare
outlays without producing any offsetting reduction in Medicare
expenditures elsewhere. Therefore, a rural community hospital's
participation in this demonstration program is unlikely to yield
benefits to the participant if budget neutrality were to be implemented
by reducing other payments for these same hospitals.
In the past six IPPS final regulations, spanning the period for
which the demonstration has been implemented, we have adjusted the
national inpatient PPS rates by an amount sufficient to account for the
added costs of this demonstration program, thus applying budget
neutrality across the payment system as a whole rather than merely
across the participants in this demonstration program. As we discussed
in the FY 2005, FY 2006, FY 2007, FY 2008, FY 2009, and FY 2010 IPPS
final rules (69 FR 49183; (70 FR 47462); (71 FR 48100); (72 FR 47392);
(73 FR 48670); and (74 FR 43922)), we believe that the language of the
statutory budget neutrality requirements permits the agency to
implement the budget neutrality provision in this manner.
In light of the statute's budget neutrality requirement, we
proposed in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR
24012) a methodology to calculate a budget neutrality adjustment factor
to the FY

[[Page 30962]]

2011 national IPPS rates. In the May 4, 2010 FY 2011 IPPS/LTCH PPS
proposed rule, the only amount that was identified to be offset for the
FY 2011 IPPS/LTCH final rule was that by which the costs of the
demonstration program, as indicated by settled cost reports beginning
in FY 2007 for hospitals participating in the demonstration during FY
2007, exceeded the amount that was identified in the FY IPPS 2007 final
rule as the budget neutrality offset for FY 2007. No dollar amount was
specified for purpose of this offset, because of a delay in the
settlement process of FY 2007 cost reports. Due to the timing of the
proposed rule in relation to the passage of Public Law 111-148, we were
unable to include in the proposed budget neutrality adjustment factor
to the FY 2011 national IPPS rates an offset that would accont for the
estimated financial impact that the demonstration would have for
certain time frames under the extension required by such Act.
In this supplemental proposed rule, we propose that such an
adjustment would incorporate the following 4 components: (1) The
estimated costs that would be incurred in FY 2011 for the 10 currently
participating hospitals as a result of the demonstration's continuation
in FY 2011; (2) the estimated cost incurred in FY 2010 for the 7
``originally participating hospitals'' that were not accounted for in
the FY 2010 IPPS final rule but that now must be accounted for as a
result of the demonstration being continued by the Affordable Care
Act's 5-year extension for such hospitals; (3) the estimated FY 2011
demonstration costs associated with the participation of up to 20 new
hospitals; and (4) a factor by which the cost of the demonstration
program in 2007, as indicated by settled cost reports beginning in FY
2007, exceeded the amount that was identified in the FY IPPS 2007 final
rule as the budget neutrality offset for FY 2007.
2. Section 410A of the MMA as Amended by Section 3123 of the Public
Law 111-148 and as Further Amended by Section 10313 of Public Law 111-
148.
Section 410Aof the MMA as amended by section 3123 of Public Law
111-148, and as further amended by section 10313 of Public Law 111-148,
affects this demonstration in several ways. First, the Secretary is
required to conduct the demonstration for an additional 5-year period
that begins on the date immediately following the last day of the
initial 5-year period under section 410A(a)(5) of the MMA as amended.
(Section 410A(g)(1) of the MMA as added by section 3123(a) of Public
Law 111-148 and as further amended by section 10313 of Public Law 111-
148). Further, the Affordable Care Act requires that in the case of a
rural community hospital that is participating in the demonstration
program as of the last day of the initial 5-year period, the Secretary
shall provide for the continued participation of such rural hospital in
the demonstration program during the 5-year extension unless the
hospital makes an election, in such form and manner as the Secretary
may specify, to discontinue such participation. (Section 410A(g)(4)(A)
of MMA as added by section 3123(a) of Public Law 111-148 and as amended
by section 10313 of Public Law 111-148). In addition, it provides that
during the 5-year extension period, the Secretary shall expand the
number of States with low population densities determined by the
Secretary to 20. (Section 410A(g)(2) of MMA as added by section 3123(a)
of Public Law 111-148 and as amended by section 10313 of Public Law
111-148.) Further, the Secretary is required to use the same criteria
and data that the Secretary used to determine the States under section
410A(a)(2) of MMA for purposes of the initial 5-year period. It also
allows not more than 30 rural community hospitals in such States to
participate in the demonstration during the 5-year extension period.
(Section 410A(g)(3) of MMA as added by section 3123(a) of Public Law
111-148 and as amended by section 10313 of Public Law 111-148.)
Additionally, it provides that the amount of payment under the
demonstration program for covered inpatient hospital services furnished
in a rural community hospital, other than services furnished in a
psychiatric or rehabilitation unit of the hospital which is a distinct
part, is the reasonable costs of providing such services for discharges
occurring in the first cost reporting period beginning on or after the
first day of the 5-year extension period. (Section 410A(g)(4)(b) of MMA
as added by section 3123(a) of Public Law 111-148 and as amended by
section 10313 of Public Law 111-148.) For discharges occurring in a
subsequent cost reporting period paid under the demonstration, the
formula in section 410A(b)(1)(B) of MMA as amended would apply. In
addition, various other technical and conforming changes were made to
section 410A of MMA, as amended by section 3123(a) of Public Law 111-
148 and as amended by section 10313 of Public Law 111-148.
3. Proposed FY 2011 Budget Neutrality Adjustment
In order to ensure that the demonstration is budget neutral as is
required by the statute, we are proposing to adjust the national IPPS
rates in the FY 2011 IPPS final rule to account for any added costs
attributable to the demonstration. Specifically, the proposed budget
neutrality adjustment would account for: (1) The estimated costs of the
demonstration in FY 2011 for the 10 currently participating hospitals;
(2) the estimated FY 2010 costs of the demonstration that were not
accounted for in the FY 2010 IPPS/RY 2010 LTCH PPS final rule for the
seven ``originally participating hospitals'' because we estimated those
hospitals' FY 2010 costs under the assumption that the demonstration
would be concluding before the end of FY 2010 for those hospitals; (3)
the estimated FY 2011 costs for up to 20 new hospitals selected to
participate in the demonstration; and (4) the amount by which the costs
of the demonstration program, as indicated by settled cost reports
beginning in FY 2007 for hospitals participating in the demonstration
during FY 2007, exceeded the amount that was identified in the FY 2007
IPPS final rule as the budget neutrality offset for FY 2007.
a. Component of the Proposed FY 2011 Budget Neutrality Adjustment That
Accounts for Estimated FY 2011 Costs of the Demonstration of the Ten
Currently Participating Hospitals
The component of the proposed FY 2011 budget neutrality adjustment
to the national IPPS rates that accounts for the estimated cost of the
demonstration in FY 2011 for the ten currently participating hospitals
would be calculated by utilizing separate methodologies for the 7
hospitals that have participated in the demonstration since its
inception and that, as explained previously, we consider to be
continuing to participate in the demonstration (``originally
participating hospitals''), and the 3 hospitals that are currently
participating in the demonstration that were among the 4 hospitals that
joined the demonstration in 2008. Different methods are used because
fiscal intermediaries' most recent final settlements of cost reports
are for periods beginning in FY 2006 for the ``originally participating
hospitals,'' whereas we are relying on available submitted
documentation for the hospitals that began participation in the
demonstration in 2008. Because the hospitals that began the
demonstration in 2008 have no settled cost reports for

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the demonstration, we are using as submitted cost documents. The budget
neutrality analysis is based on the assumption that all 10 of these
hospitals will continue the demonstration under the 5-year extension
period provided by the Affordable Care Act. We believe that this
assumption is warranted since they have participated in the initial 5
year demonstration period so far, which we believe indicates that they
will choose to continue to avail themselves of the levels of
reimbursement under the demonstration.
The estimate of the portion of the proposed budget neutrality
adjustment that accounts for the estimated costs of the demonstration
in FY 2011 for the 7 ``originally participating hospitals'' is based on
data from their second year cost reports--that is, cost reporting
periods beginning in FY 2006. We propose to use these cost reports
because they are the most recent complete cost reports and thus we
believe they enable us to estimate FY 2011 costs as accurately as
possible. In addition, we estimate the cost of the demonstration in FY
2011 for 2 of the 4 hospitals that joined the demonstration in 2008
based on data from each of their cost reporting periods beginning
January 1, 2008. Similarly, we propose to use these cost reports
because they are the most recent cost reports and thus we believe they
enable us to estimate FY 2011 costs for these 2 hospitals as accurately
as possible. Since one of the 4 hospitals that began in 2008 has
withdrawn, there is one hospital remaining among those that began in
that year. The remaining hospital of the 4 that began in 2008 is an
Indian Health Service provider. Historically, the hospital has not
filed standard Medicare cost reports. In order to estimate its costs,
we are proposing to use an analysis of Medicare inpatient costs and
payments submitted by the hospital for the cost reporting period
October 1, 2005 through September 30, 2006. We are proposing to use
this data because it represents a detailed analysis of the hospital's
cost-payment profile, and we expect that such an account will not
change appreciably from year to year because it is a relatively small
provider serving a limited population. When we add together the
estimated costs of the demonstration in FY 2011 for the 7 ``originally
participating hospitals'' that have participated in the demonstration
since its inception and the 3 hospitals selected in 2008 that are still
participating, the total estimated cost is $20,930,484. This estimated
amount reflects the difference between these 10 participating
hospitals' estimated costs in FY 2011 under the methodology set forth
in Public Law 108-173 as amended by Public Law 111-148 and the
estimated amount the hospitals would have been paid under the IPPS in
FY 2011. With the exception of the Indian Health Service provider, the
estimated costs under the demonstration are derived from data on the
hospitals' cost reports. The cost reports state the dollar amount
attributable to Medicare inpatient costs for the cost report year. They
also state the dollar amount that would be paid if the inpatient
prospective payment system were in effect. For each hospital, the
difference between these two amounts is updated according to the market
basket update factors for inpatient hospital costs reported by the CMS
Office of the Actuary for the years between the cost report year and FY
2011. In accordance with guidance from the Office of the Actuary, we
also assume a 2 percent annual volume increase. In the FY 2011 final
rule, we may revise this estimate if updated cost report data becomes
available.
b. Portion of the Proposed FY 2011 Budget Neutrality Adjustment That
Accounts for Estimated FY 2010 Costs of the Demonstration That Were Not
Accounted for in the FY 2010 IPPS Final Rule for the Seven ``Originally
Participating Hospitals''
As explained above, subsection (g)(4)(A) of 410A of the MMA as
added by section 3123(a) of Public Law 111-148 as amended by section
10313 of Public Law 111-148, provided for the continued participation
of rural community hospitals that were participating in the
demonstration as of the last day of the initial 5-year [demonstration]
period. One of the effects of this extension is that the seven
``originally participating hospitals'' (those hospitals that have
participated in the demonstration since its inception and that continue
to participate in the demonstration or were participating in the
demonstration as of the last day of its initial 5-year demonstration
period (that, is the 2 rural community hospitals that concluded their
period of performance in December 2009)) which were scheduled to end
their participation in the demonstration before the conclusion of FY
2010 would continue to participate for the remainder of FY 2010 and
beyond as applicable. Section II.F.3. of the preamble, we are assuming
for purposes of our budget neutrality analysis in section II. F.3.a. of
the preamble that the seven ``originally participating hospitals'' are
also currently participating hospitals. See for our explanation).
However, we note that the portion of the FY 2010 budget neutrality
adjustment to the national IPPS rates that was included in the FY 2010
IPPS final rule that accounted for the estimated costs of the
demonstration in FY 2010 did not take into account costs of the
demonstration for those hospitals beyond the anticipated end date of
their initial demonstration period. (For example, for a hospital whose
cost report ended in June 30, 2010, we counted only nine months for the
budget neutrality adjustment for the FY 2010 IPPS/LTCH PPS final rule.
Under this proposal, we would also adjust the national IPPS rates to
account for the estimated costs for this hospital for the remaining
three months of FY 2010.) We are proposing to include a component in
the FY 2011 budget neutrality adjustment to account for the estimated
costs of the demonstration in FY 2010 that were not accounted for in
the FY 2010 IPPS/RY 2010 LTCH PPS final rule for the seven ``originally
participating hospitals'' because we calculated the FY 2010 cost
estimate for that year's final rule assuming that the demonstration
would end before the end of that fiscal year for those hospitals. We
are proposing the following methodology to account for such estimated
costs: Step one, for each of the seven ``originally participating
hospitals,'' we divide the number of months that were not included in
the estimate of the FY 2010 demonstration costs included in the final
IPPS FY 2010 rule by 12. This step is necessary to determine for each
of the seven ``originally participating hospitals'' the fraction of FY
2010 for which the estimate of the FY 2010 demonstration was not
included. Step two, for each of the seven ``originally participating
hospitals,'' the percentage that results in step one is multiplied by
the estimate of the cost attributable to the demonstration in FY 2010
for the hospital. The estimate for the fraction of the hospital's cost
for fiscal year 2010 not included in the estimate in the FY 2010 IPPS
rule is arrived at by multiplying this fraction by the estimate of
costs for the entire year. The estimate of the costs of the
demonstration for FY 2010 for the seven ``originally participating''
hospitals is derived from data found in their cost reports for cost
report years beginning in FY 2006. These cost reports show dollar
amounts for costs for Medicare inpatient services (that is, the
Medicare payment amount in that cost report year for Medicare inpatient
services) and the dollar amount that would have been paid under the
IPPS. Since these cost report years all ended during FY 2007, this

[[Page 30964]]

difference, respective to each of the seven ``originally participating
hospitals'', is updated according to the market basket updates for
inpatient hospital costs reported by the CMS Office of the Actuary for
the years from FY 2008 through FY 2011. In accordance with guidance
from the Office of the Actuary, we also assume an annual two percent
volume increase. (This calculation is not necessary for the hospitals
that began participating in the demonstration in 2008 because the
portion of the FY 2010 budget neutrality adjustment that accounts for
estimated FY 2010 demonstration costs in the FY 2010 IPPS/RY 2010 LTCH
PPS final rule incorporates a cost estimate for each of these hospitals
based on the entirety of the Federal fiscal year.) The estimate of
additional costs attributable to the demonstration in FY 2010 for the 7
``originally participating hospitals'' that were not accounted for in
the FY 2010 final rule is $6,488,221. Similar to above, this estimate
is based on the assumption that the seven ``originally participating
hospitals'' will choose to continue participating in the demonstration
past the end of their original 5-year demonstration periods. We believe
that this assumption is valid, because they are participating in the
demonstration to this date, or, for the case of the two hospitals that
ended active participation in the demonstration program in December
2009, they were participating as of the last day of their initial 5-
year period.
c. Portion of the Proposed FY 2011 Budget Neutrality Adjustment That
Accounts for Estimated FY 2011 Costs for Hospitals Newly Selected To
Participate in the Demonstration
Section 410A(g)(3) of MMA, as added by section 3123 of Public Law
111-148, and as amended by section 10313 of Public Law 111-148,
provides that ``[n]otwithstanding subsection (a)(4), during the 5-year
extension period, not more than 30 rural community hospitals may
participate in the demonstration program under this section.''
Consequently, up to 20 additional hospitals may be added to the
demonstration (30 hospitals minus the 10 currently participating
hospitals). In order to ensure budget neutrality for 20 new
participating hospitals, we are proposing to include a component in the
budget neutrality adjustment factor to the FY 2011 national IPPS rates
to account for the estimated FY 2011 costs of those new hospitals. For
purposes of estimating the FY 2011 costs of the demonstration for 20
new hospitals, we are proposing to estimate such costs from the average
annual cost per hospital derived from the estimate of the 10 currently
participating hospitals' costs attributable to the demonstration for FY
2011. Because the statute allows the potential for 20 additional
hospitals for the demonstration, we are basing this estimate on the
assumption that 20 hospitals will join. Our experience analyzing the
cost reports so far for demonstration hospitals shows a wide variation
in costs among the hospitals. Given the wide variation in cost profiles
that might occur for additional hospitals, we believe that estimating
the total demonstration cost for FY 2011 for 20 additional hospitals
from the average annual cost of the currently existing hospitals yields
the most accurate prediction because it is reflective of the historical
trend of participant behavior under the demonstration and should give
an accurate as possible prediction of future participant behavior. We
believe that, although there is variation in costs, formulating an
estimate from the average costs of as many as 10 hospitals gives as
good as possible a prediction of what the demonstration costs for each
of 20 additional hospitals. We are estimating the average cost for each
of the 20 additional hospitals not on a range of costs, but on an
estimate of this average cost per hospital, obtained by dividing
$20,930,484, the estimated cost amount for FY 2011 identified for the
10 participating hospitals in subsection (a), by 10. The estimate for
costs attributable to the demonstration for 20 additional hospitals in
FY 2011 is $41,860,968.
d. Portion of the Proposed FY 2011 Budget Neutrality Adjustment That
Offsets the Amount by Which the Costs of the Demonstration in FY 2007
Exceeded the Amount That Was Identified in the Final FY 2007 IPPS Final
Rule as the Budget Neutrality Offset for FY 2007
In addition, in order to ensure that the demonstration in FY 2007
was budget neutral, we are proposing to incorporate a component into
the budget neutrality adjustment factor to the FY 2011 national IPPS
rates, which would offset the amount by which the costs of the
demonstration program as indicated by settled cost reports beginning in
FY 2007 for hospitals participating in the demonstration during FY 2007
exceeded the amount that was identified in the FY 2007 IPPS final rule
as the budget neutrality offset for FY 2007. Specifically, we are
proposing the following methodology:
Step One: Calculate the FY 2007 costs of the demonstration
program according to the settled cost reports that began in FY 2007 for
the then participating hospitals (which represent the third year of the
demonstration for each of the then participating hospitals). (We
propose to use these settled cost reports, which represent the third
year of the demonstration for each of the then participating hospitals
because they correspond most precisely to FY 2007 and we therefore
believe correctly represent FY 2007 inpatient costs for the
demonstration during that period).
Step Two: Subtract the amount that was offset by the
budget neutrality adjustment for FY 2007 ($9,197,870) from the costs of
the demonstration in FY 2007 as calculated in step one; and
Step Three: The result of step two is a dollar amount, for
which we would calculate a factor that would offset such amounts and
would be incorporated into the proposed overall budget neutrality
adjustment to national IPPS rates for FY 2011. This specific component
to the overall budget neutrality adjustment for FY 2011 would account
for the difference between the costs of the demonstration in FY 2007
and the amount of the budget neutrality adjustment published in the FY
2007 IPPS final rule and therefore ensures that the demonstration is
budget neutral for FY 2007.
Because the settlement process for the demonstration hospitals'
third year cost reports, that is, cost reporting periods starting in FY
2007, has experienced a delay, for this FY 2011 IPPS proposed rule, we
are unable to state the costs of the demonstration corresponding to FY
2007 and as a result are unable to propose the specific numeric
adjustment representing this offsetting process that would be applied
to the national IPPS rates. However, we expect the cost reports
beginning in FY 2007 for hospitals that participated during FY 2007 to
be settled before the FY 2011 IPPS/LTCH final rule is published.
Therefore, for the FY 2011 IPPS/LTCH PPS final rule, we expect to be
able to calculate the amount by which the costs corresponding to FY
2007 exceeded the amount offset by the budget neutrality adjustment for
FY 2007. Consequently, by adding this proposed amount to the above
proposed amounts estimated in subsections (a) through (c) of section
II.F.3.a. of the preamble, we arrive at a proposed amount, from which
we would be able to calculate the proposed budget neutrality factor
which we would use to adjust the FY 2011 national IPPS rates in the FY
2011 IPPS/LTCH PPS final rule.
For this supplemental proposed FY 2011/LTCH PPS rule, the estimated
amount for the adjustment to the national IPPS rates is the sum of the
amounts specified in subsections (a)

[[Page 30965]]

through (c) above or $69,279,673 and the amount resulting from the
proposed method in subsection (d) that we expect to be calculated in
the FY 2011 IPPS/LTCHPPS final rule. Subsections (a) through (c) state
dollar amounts, which represent estimated costs attributable to the
demonstration for the respective component of the overall estimated
calculation of the budget neutrality factor for FY 2011. This estimated
amount is based on the specific assumptions identified, as well as from
data sources that are used because they represent either the most
recently finalized or, if as submitted, the most recent available cost
reports. The overall budget neutrality change in the final FY 2011
IPPS/LTCH PPS rule, if any of these factors were to change.

G. Proposed Changes to Payment Rates for IPPS for Capital-Related Costs
for FY 2011

Although the provisions of Public Law 111-148, do not directly
affect the payment rates and policies for the IPPS for capital-related
costs, in section II. of the Addendum of this supplemental proposed
rule we are proposing the capital IPPS standard Federal rates for FY
2011. This is necessary because the wage index changes required by the
provisions of Public Law 111-148 (discussed above in section II.A. of
this preamble) affect the proposed budget neutrality adjustment factor
for changes in DRG classifications and weights and the geographic
adjustment factor (GAF) since the GAF values are derived from the wage
index values (see Sec. 412.316(a)). In addition, the provisions of
Public Law 111-148, (discussed above in this preamble) also necessitate
a revision to the proposed outlier payment adjustment factor since a
single set of thresholds is used to identify outlier cases for both
inpatient operating and inpatient capital-related payments (see Sec.
412.312(c)). The outlier thresholds are set so that operating outlier
payments are projected to be 5.1 percent of total operating IPPS DRG
payments. Section 412.308(c)(2) provides that the standard Federal rate
for inpatient capital-related costs be reduced by an adjustment factor
equal to the estimated proportion of capital-related outlier payments
to total inpatient capital-related PPS payments. The proposed capital
IPPS standard Federal rates for FY 2011 are discussed in section II. of
the Addendum of this supplemental proposed rule.

H. Payment for Critical Access Hospital Outpatient Services and
Ambulance Services

Section 1834(g) of the Act establishes the payment rules for
outpatient services furnished by a critical access hospital (CAH).
Section 403(d) of Public Law 106-113 (BBRA) amended section 1834(g) of
the Act to provide for two methods of payment for outpatient services
furnished by a CAH. Specifically, section 1834(g)(1) of the Act, as
amended by Public Law 106-113, provided that the amount of payment for
outpatient services furnished by a CAH is equal to the reasonable costs
of the CAH in providing such services (the physician or other
practitioner providing the professional service receives payment under
the Medicare Physician Fee Schedule). In the alternative, the CAH may
make an election, under section 1834(g)(2) of the Act, to receive
amounts that are equal to ``the reasonable costs'' of the CAH for
facility services plus, with respect to the professional services, the
amount otherwise paid for professional services under Medicare, less
the applicable Medicare deductible and coinsurance amount. The election
made under section 1834(g)(2) of the Act is sometimes referred to as
``method II'' or ``the optional method.'' Throughout this section of
this preamble, we refer to this election as ``the optional method.''
Section 202 of Public Law 106-554 (BIPA) amended section 1834(g)(2)(B)
of the Act to increase the payment for professional services under the
optional method to 115 percent of the amount otherwise paid for
professional services under Medicare. In addition, section 405(a)(1) of
Public Law 108-173 (MMA) amended section 1834(g)(l) of the Act by
inserting the phrase ``equal to 101 percent of'' before the phrase
``the reasonable costs.'' However, the MMA did not make a corresponding
change to section 1834(g)(2)(A) of the Act regarding the amount of
payment for facility services under the optional method.
Section 1834(l)(8), as added by section 205 of Public Law 106-554,
establishes the payment methodology for ambulance services furnished by
a CAH or by an entity that is owned and operated by a CAH. This
provision states that payment is made at ``the reasonable costs
incurred in furnishing ambulance services if such services are
furnished by a critical access hospital (as defined in section
1861(mm)(1) of the Act), or by an entity that is owned and operated by
a critical access hospital, but only if the critical access hospital or
entity is the only provider or supplier of ambulance services that is
located within a 35-mile drive of such critical access hospital.''
Section 3128(a) of Public Law 111-148 amended sections
1834(g)(2)(A) and 1834(l)(8) of the Act by inserting ``101 percent of''
before ``the reasonable costs.'' As such, section 3128(a) increases
payment for outpatient facility services under the optional method and
payment for ambulance services furnished by a CAH or an entity owned
and operated by a CAH, to 101 percent of reasonable costs. Section
3128(b) states that the amendments made under section 3128(a) shall
take effect as if they were included in the enactment of section 405(a)
of Public Law 108-173. Section 405(a) of Public Law 108-173, which
provided that, in general, inpatient, outpatient, and covered SNF
services provided by a CAH would be reimbursed at 101 percent of
reasonable cost, was applicable to payments for services furnished
during cost reporting periods beginning on or after January 1, 2004.
In order to implement section 3128 of Public Law 111-148, we are
proposing to amend the regulations at Sec. 413.70(b)(3)(ii)(A) to
state that, effective for cost reporting periods beginning on or after
January 1, 2004, under the optional method, payment for facility
services will be made at 101 percent of reasonable cost. Accordingly,
regardless of whether a physician/practitioner has reassigned his/her
billing rights to the CAH, payment for CAH facility services will be
made at 101 percent of reasonable costs. In addition, we are proposing
to implement the change in payment for ambulance services provided by
section 3128 of Public Law 111-148 by amending the regulations at Sec.
413.70(b)(5)(i) to state that effective for cost reporting periods
beginning on or after January 1, 2004, payment for ambulance services
furnished by a CAH or an entity that is owned and operated by a CAH is
101 percent of the reasonable costs of the CAH or the entity in
furnishing those services, but only if the CAH or the entity is the
only provider or supplier of ambulance services located within a 35-
mile drive of the CAH or the entity. We note that we do not believe
these proposals will result in additional payments to CAHs for prior
periods because we believe in fact that CMS has paid CAHs for these
services at 101 percent of reasonable costs during these prior periods.

I. Extension of Certain Payment Rules for Long-Term Care Hospital
Services and Moratorium on the Establishment of Certain Hospitals and
Facilities

1. Background
On December 29, 2007 the Medicare, Medicaid, and SCHIP Extension
Act of 2007 (MMSEA) (Pub. L. 110-173) was enacted. Section 114 of
MMSEA,

[[Page 30966]]

entitled ``Long-term care hospitals,'' made a number of changes
affecting payments to LTCHs for inpatient services. In May 6, 2008 and
May 22, 2008 Federal Register (73 FR 24871 and 73 FR 29699,
respectively), we issued two interim final rules (IFCs), implementing
provisions of section 114 of the MMSEA. The May 6, 2008 IFC implemented
section 114(c)(3) of the MMSEA which required a 3-year delay in the
application of certain provisions of the payment adjustment for short-
stay outliers (SSOs), and section 114(e)(4)(1) and (2) which specified
revisions to the RY 2008 standard Federal rate for LTCHs. The May 22,
2008 IFC implemented section 114(c)(1) and (c)(2), providing for a 3-
year delay in the application of the 25 percent threshold payment
adjustment for discharges from LTCHs and LTCH satellite facilities that
were admitted from certain referring hospitals in excess of various
percentage thresholds. The May 22, 2008 IFC also implemented section
114(d) of the MMSEA relating to the 3-year moratorium on the
establishment of new LTCHs and LTCH satellite facilities and on
increases in beds in existing LTCHs and LTCH satellite facilities.
In addition, we revised regulations at Sec. 412.523(d)(3)
implementing section 114(c)(4) of MMSEA. Our regulations provided that
for a 3-year period beginning on December 29, 2007, the Secretary shall
not make the one-time prospective adjustment to the LTCH PPS payment
rates earlier than December 29, 2010 and later than December 29, 2012
(73 FR 26804). Section 4302 of the American Recovery and Reinvestment
Act of 2009 (ARRA) ( Pub. L. 111-5) enacted on February 17, 2009,
included several amendments to section 114(c) and (d) of the MMSEA. The
provisions of section 4302 of the ARRA were implemented in an IFC which
was published with the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR
43990 through 43994). In that same final rule, we responded to comments
and finalized the MMSEA provisions in the May 6, 2008 and the May 22,
2008 IFCs that had not otherwise modified by the ARRA. We intend to
finalize the ARRA provisions and respond to comments on the ARRA IFC,
in the FY 2011 IPPS/LTCH PPS final rule.
The discussion in section XX pertain to the specific changes to the
LTCH PPS policies that are mandated by amendments to section 114(c) and
(d) of the MMSEA, as amended by section 4302 of the ARRA and further
amended by section 3106 of Public Law 111-148 as amended by section
10312 of Public Law 111-148.
Section 114(c) and (d) of the MMSEA as amended by section 4302 of
ARRA as amended by section 3106 of the Public Law 111-148 and as
further amended by section 10312 of Public Law 111-148 provides for a
2-year extension to payment policies relating to long-term care
hospitals (LTCHs) and LTCH satellite facilities. Specifically, these
provisions affect payment adjustments for short stay outliers (SSOs),
the one-time prospective adjustment to the standard Federal rate, the
25 percent payment threshold policy, and the moratorium on the
establishment of new LTCHs and LTCH satellite facilities. In this
supplementary proposed rule for the LTCH PPS, we are implementing the
policies mandated by the amendments to section 114(c) and (d) of the
MMSEA as amended by section 4302 of the ARRA and as further amended by
section 3106 of Public Law 111-148, and section 10312 of Public Law
111-148, and are proposing to revise the regulations accordingly to
incorporate those changes. In the sections below, we will briefly
describe each of these policies and propose to incorporate into the
regulations their 2-year extension.
2. Short-Stay Outlier Policy
In the FY 2003 LTCH PPS final rule (67 FR 55995), we established a
special payment policy for SSO cases at Sec. 412.529. SSO cases are
cases with a covered LOS that is less than or equal to five-sixths of
the geometric average LOS for each LTC-DRG. When we established the SSO
policy, we explained that ``[a] short stay outlier case may occur when
a beneficiary receives less than the full course of treatment at the
LTCH before being discharged'' (67 FR 55995).
We later refined the SSO policy in the RY 2008 LTCH PPS final rule.
Specifically, the RY 2008 LTCH PPS final rule added an additional
payment methodology at Sec. 412.529(c)(3)(i) for a SSO case with a
covered length of stay (LOS) that is less than or equal to one standard
deviation from the geometric ALOS of the same DRG under the IPPS as the
LTC-DRG to which the case had been assigned (referred to as the ``IPPS
comparable threshold''). The Medicare payment for that SSO case where
the covered LOS is less than or equal to the ``IPPS comparable
threshold'' would be based on the least of the following:
100 percent of the estimated cost of the case.
120 percent of the LTC-DRG specific per diem amount
multiplied by the covered LOS of the particular case.
The full LTC-DRG.
++ An amount comparable to the hospital IPPS per diem amount
determined under Sec. 412.529(d)(4). Under that SSO payment formula,
cases where the covered LOS is greater than the ``IPPS comparable
threshold,'' the fourth payment option would be replaced with the blend
of the 120 percent of the LTC-DRG specific per diem amount and an
amount comparable to the IPPS per diem amount determined under Sec.
412.529(d)(4). (See (72 FR 26905 through 26918).)
Section 114(c)(3) of MMSEA established a 3-year delay of the
application of the methodology at Sec. 412.529(c)(3)(i) that was added
in the RY 2008 LTCH PPS final rule. It specified that the Secretary
shall not apply the amendments finalized on May 11, 2007 (72 FR 26992)
made to the short-stay outlier payment provision for long-term care
hospitals contained in Sec. 412.529(c)(3)(i) or any similar provisions
for the 3-year period beginning on the date of enactment of this Act
[December 29, 2007]. Section 114(c)((3) of the MMSEA as amended by
section 3106(a) of the Public Law 111-148, and as amended by section
10312(a) of Public Law 111-148, adds an additional 2 years to the 3-
year delay of the application of Sec. 412.529(c)(3)(i). Specifically,
these provisions together result in the phrase ``3-year period'' being
replaced with the phrase ``5-year period'' each place it appears in
114(c) of MMSEA as amended by the ARRA. Thus, the reference to the 3-
year period in delay of application of Sec. 412.529(c)(3)(i) is
changed to be 5-year period of delay. Consequently, the Secretary will
not apply for the 5-year period beginning on the date of enactment of
MMSEA (December 29, 2007) the policy at Sec. 412.529(c)(3)(i). We note
that this provision of the law is self-implementing and in this
supplementary proposed rule, we are proposing to incorporate existing
law regarding the additional 2 year delay into the regulations at Sec.
412.529(c)(3)(i) to reflect this policy change.
3. The One-time Adjustment of the Standard Federal Rate
In the August 30, 2002 LTCH PPS final rule (67 FR 56027), we
provided in Sec. 412.523(d)(3) of the regulations, for the possibility
of making a one-time prospective adjustment to the LTCH PPS rates by
July 1, 2008, so that the effect of any significant difference between
actual payments and estimated payments for the first year of the LTCH
PPS would not be perpetuated in the LTCH PPS rates for future years.
Later, section 114(c)(4) of MMSEA was enacted which provided a 3-
year delay in the application of

[[Page 30967]]

Sec. 412.523(d)(3). Specifically, section 114(c)(4) of MMSEA provides
that the ''Secretary shall not, for the 3-year period beginning on the
date of the enactment of this Act, make the one time prospective
adjustment to long-term care hospital prospective payment rates
provided for in section 412.523(d)(3) of title 42, Code of Federal
Regulations, or any similar provision.'' The effect of this provision
was that no one-time budget neutrality adjustment could be made earlier
than December 29, 2010. (Following the enactment of MMSEA, we modified
the regulations at Sec. 412.523(d)(3) to capture the 3-year delay
required by section 114(c)(4)MMSEA and our proposal to conform our
regulation to more accurately reflect the purpose of providing for a
possible one-time budget neutrality adjustment.) (See 73 FR 26800
through 26805). Now, section 3106(a) of Public Law 111-148, together
with section 10312 of Public Law 111-148 results in, an additional 2
years being added to the existing 3-year delay of Sec. 412.523(d)(3).
Specifically, these amendments together result in the phrase ``3-year
period'' being replaced with the phrase ``5-year period'' each place it
appears in 114(c) of MMSEA as amended by the ARRA. Thus, the reference
to the 3-year period in delay of application Sec. 412.523(d)(3) is
changed to be a 5-year period of delay. Consequently, the Secretary
shall not apply for the 5-year period beginning on the date of the
enactment of MMSEA (December 29, 2007) the one-time prospective
adjustment provided for in Sec. 412.523(d)(3). We note that this
provision of the law is self-implementing and we are proposing to
incorporate existing law regarding this additional 2-year delay of the
one-time budget neutrality adjustment into the regulations at Sec.
412.523(d)(3) to reflect this policy. Thus, we are proposing to revise
Sec. 412.523(d)(3) to specify that the Secretary is precluded from
making the one-time adjustment until December 29, 2012.
4. Modification of Certain Payment Adjustments to Certain LTCHs and
LTCH Satellite Discharges
The timeframes outlined in section 114(c)(1) and (2) of MMSEA are
amended by ARRA and section 3106(a) of Public Law 111-148, and as
further amended by section 10312(a) of Public Law 111-148 are increased
from 3 years to 5 years, thereby extending for an additional 2 years
the delay in application of the 25 percent patient threshold amount
under Sec. 412.534 and Sec. 412.536 for certain LTCHS and LTCH
satellite facilities and the increases in the patient thresholds
outlined in section 114(c)(2) of MMSEA as they apply to an
``applicable'' long-term care hospital or satellite facility as set
forth in section 114(c)(2)(A) and (B) of MMSEA as amended.
Specifically, Sec. 3106(a) of Public Law 111-148 together with section
10312 of Public Law 111-148, results in the substituting of the phrase
``5-year period'' for the phrase ``3-year period'' each time it appears
in section 114(c) of MMSEA as amended by ARRA. This provision of the
law is self-implementing.
With respect to section 114(c)(1) of MMSEA as amended by ARRA
(Delay in Application of [the] 25 Percent Patient Threshold Payment
Adjustment), section 3106(a) of the Public Law 111-148 and as further
amended by section 10312(a) of Public Law 111-148 results in an
additional 2-year delay being added to the existing 3-year delay in
application of the 25 percent threshold amount under Sec. 412.534 and
Sec. 412.536. Specifically, under Sec. 114(c)(1)(A) and (B) of MMSEA
as amended by the ARRA and the Affordable Care Act, the Secretary shall
not apply, for cost reporting periods beginning on or after July 1,
2007 for a 5-year period--(A) Sec. 412.536 of title 42, Code of
Federal Regulations, or any similar provision, to free standing long-
term care hospitals or to a long-term care hospital, or satellite
facility, that as of December 29, 2007, was co-located with an entity
that is a provider-based, off-campus location of a subsection (d)
hospital which did not provide services payable under section 1886(d)
of the Act at the off-campus location; and (B) such section or Sec.
412.534 of title 42, Code of Federal Regulations, or any similar
provisions, to a long-term care hospital identified by the amendment
made by section 4417(a) of the BBA. In order to incorporate existing
law requiring that application of the above provisions will not be
applied prior to cost reporting periods beginning on July 1, 2012, we
are proposing to modify our regulations at Sec. 412.534(h)(4) and
Sec. 412.536(a)(1).
With respect to section 114(c)(2) of MMSEA as amended by ARRA and
section 3106(a) of Public Law 111-148 and as amended by section 10312
of Public Law 111-148 the effective date provided in section
114(c)(2)(C) of MMSEA is amended such that the provision specifies that
subparagraphs A and B [of section 114(c)(2)] shall apply to cost
reporting periods beginning on or after October 1, 2007 (or July 1,
2007, in the case of a satellite facility described in Sec.
412.22(h)(3)(i) of title 42, Code of Federal Regulations) for a 5-year
period.) The effect of this self-implementing effective date change is
that under section 114(c)(2)(A) of MMSEA the time period during which
the increased percentage thresholds apply to an ``applicable long-term
care hospital or satellite facility'' which is located in a rural area
or which is co-located with an urban single or MSA-dominant hospital,
under 42 CFR 412.534(d) and (e) is increased from a 3-year period to a
5-year period. Thus, for the 5-year period beginning on or after
October 1, 2007, payment to an ``applicable LTCH hospital or LTCH
satellite that is located in a rural area or is co-located with a MSA-
dominant hospital or urban single hospital under paragraphs (d) and
(e), of 42 CFR 412.534, shall not be subject to any payment adjustment
under such section if no more than 75 percent of the hospital's
Medicare discharges (other than discharges described in paragraph
(d)(2) or (e)(3) of such section are admitted from a co-located
hospital. We are proposing to incorporate into our regulations at
412.534(d)(1) through (d)(3) and (e)(1) through (e)(3); the above-
described self-implementing the Affordable Care Act changes by
extending the sunsetting of the threshold percentage increase an
additional 2 years, to cost reporting periods beginning on or after
October 1, 2012, as applicable, July 1, 2007 for a satellite facility
described in 42 CFR 412.22(h)(3)(i).)
In addition, the change in the effective date change required in
section 114(c)(2)(C) of MMSEA, as amended by ARRA and the Affordable
Care Act, is that the time period during which the increased percentage
threshold applicable to an ``applicable'' LTCH or satellite, as defined
in section 114(c)(2)(ii) of the MMSEA as amended by section
4302(a)(2)(A) of the ARRA, which is co-located with another hospital is
increased from a 3-year period to a 5-year period. Thus, for the 5-year
period beginning on or after October 1, 2007, payment to an
``applicable'' LTCH or LTCH satellite facility that is co-located with
another hospital shall not be subject to any payment adjustment under
Sec. 412.534 if no more than 50 percent of the hospital's Medicare
discharges (other than discharges described in paragraph (c)(3) of such
section) are admitted from a co-located hospital. We are proposing to
incorporate this self-implementing Affordable Care Act change into our
regulations at Sec. 412.534(c)(1), (2) and (3) by extending the
sunsetting of the threshold percentage increase an additional 2 years,
to cost reporting periods beginning on or after October 1, 2012 or July
1, 2012, as applicable.

[[Page 30968]]

5. Moratorium on the Increase in Number of Beds in Existing Long-Term
Care Hospitals or Long-Term Care Hospital Satellite Facilities
Section 114(d) of MMSEA provides for a 3-year moratorium with two
distinct aspects, one for the establishment and classification of a
LTCH or a LTCH satellite facility, other than an existing LTCH or
facility, and the other for the increase of hospital beds in existing
LTCHs and LTCH satellite facilities. Specifically, section 114(d)(1)(A)
of MMSEA provides that, during the 3-year period beginning on the date
of enactment of this Act on December 29, 2007, the Secretary shall
impose a moratorium ``subject to paragraph (2), on the establishment
and classification of a long-term care hospital or satellite facility,
other than an existing long-term care hospital or facility.'' Section
114(d)(1)(B) of MMSEA unamended, provides that, during the 3-year
period beginning of the date of enactment of this Act, the Secretary
shall impose a moratorium ``subject to paragraph (3), on an increase of
long-term care hospital beds in existing long-term care hospitals or
satellite facilities.''
Sections 114(d)(2) of MMSEA unamended provides for exceptions to
the moratorium on the development of a LTCH or LTCH satellite facility,
other than an existing LTCH or LTCH satellite facility, imposed by
section 114(d)(1)(A) of MMSEA. (The definition of an existing LTCH and
satellite facility for purposes of this policy is codified at Sec.
412.23(e)(7)(i).) Specifically, under this MMSEA provision, the
moratorium, is effective from December 29, 2007 through December 28,
2010 unless one of the following three exceptions has been met:
The LTCH began ``its qualifying period for payment as a
long-term care hospital under section 412.23(e) of title 42, Code of
Federal Regulations, on or before the date of enactment of this Act.''
(See section 114(d)(2)(A) of MMSEA).
The LTCH has a binding written agreement with an outside,
unrelated party for the actual construction, renovation, lease, or
demolition for a LTCH and has expended before December 29, 2007 at
least 10 percent of the estimated cost of the project or, if less,
$2,500,000. (See section 114(d)(2)(B) of MMSEA).
The LTCH has obtained an approved certificate of need in a
State where one is required on or before December 29, 2007 (see section
114(d)(2)(C) of MMSEA). (See 73 FR 29705 through 29707 and 74 FR
43985).
The moratorium on an increase of beds is subject to the exception
at section 114(d)(3) of MMSEA. Specifically, section 114(d)(3) of the
MMSEA unamended stated that the moratorium on an increase in beds shall
not apply if an existing LTCH or LTCH satellite facility is ``located
in a State where there is only one other long-term care hospital; and
requests an increase in beds following the closure or the decrease in
the number of beds of another long-term care hospital in the State.''
We implemented section 114(d) in the May 22, 2008 IFC (73 FR 29704
through 29707); the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR
43985 through 43990) and Sec. 412.23(e)(5) through (e)(7).
Section 4302 of the ARRA added another exception to the moratorium
on increases in the number of beds at existing LTCHs and LTCH satellite
facilities. Specifically, section 4302(b) of the ARRA, added an
additional exception to the bed-increase moratorium in an existing
hospital or satellite facility ``* * * if the hospital or facility
obtained a certificate of need for an increase in beds that is in a
State for which such certificate of need is required and that was
issued on or after April 1, 2005, and before December 29, 2007, * *
*.'' Accordingly, we revised our regulations at Sec. 412.23(e)(7)(B)
to include this new exception to the moratorium on an increase in the
number of beds in existence in an existing LTCH or LTCH satellite
facility beyond those in existence on December 29, 2007. (See 74 FR
43991 and 43992)
Section 114(d) of MMSEA as amended by section 4302(b) of ARRA and
section 3106(b) of Public Law 111-148 and section 10312(b) of Public
Law 111-148 adds an additional 2 years to the 3-year moratorium on the
development of new LTCHs and LTCH satellite facilities and on the
increase in the number of beds in existing LTCHs and LTCH satellites
promulgated by MMSEA. Specifically, it raises the length of the
moratorium specified in section 114(d) of MMSEA as amended by ARRA from
a 3-year period to a 5-year period. Therefore, the moratorium will be
in effect until December 28, 2012. In this supplementary proposed rule,
we are proposing to revise Sec. 412.23(e)(6)(i) and (e)(7)(ii) by
changing the ending date of the moratorium provisions from December 28,
2010 to December 28, 2012 to reflect these self-implementing Affordable
Care Act changes.

J. Long-Term Care Hospital Proposed Market Basket Update and Other
Proposed Changes

1. Background
In section VII. of the preamble of the May 4, 2010 FY 2011 IPPS/
LTCH PPS proposed rule, we discuss our proposed changes to the payment
rates, factors, and specific policies under the LTCH PPS for FY 2011.
Although a number of the provisions of Public Law 111-148 and Public
Law 111-152 affect the LTCH PPS, due to the timing of the passage of
the legislation, we were unable to address those provisions in the May
4, 2010 FY 2011 IPPS/LTCH PPS proposed rule. Therefore, the proposed
policies and payment rates in that proposed rule do not reflect the new
legislation.
Below we address the provisions of Public Law 111-148 and Public
Law 111-152 that affect our proposed policies and payment rates for FY
2011 under the LTCH PPS. In addition, we have issued further
instructions implementing the provisions of Public Law 111-148, as
amended, that affect the policies and payment rates for RY 2010 under
the LTCH PPS. Specifically, we have established revised RY 2010 rates
and factors elsewhere is this Federal Register consistent with the
provisions of sections 3401(c) and (p) and 10319(b) of Pub L. 111-148
and section 1105(b) of Public Law 111-152, as amended.
2. Revision of Certain Market Basket Updates as Required by Public Law
111-148 and Public Law 111-152
Section 1886(m)(3)(A)(ii) of the Act, as added by section 3401(c)
of Public Law 111-148, specifies that for each of rate years 2010
through 2019, any annual update to the standard Federal rate shall be
reduced by the other adjustment specified in new section 1886(m)(4) of
the Act. Furthermore, section 1886(m)(3)(A)(i) of the Act specifies
that for rate year 2012 and subsequent rate years, any annual update to
the standard Federal rate shall be reduced by the productivity
adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act.
Section 1886(m)(3)(A)(ii) and sections 1886(m)(4)(A) and (B) of the
Act, require a 0.25 percentage point reduction for rate year 2010 and a
0.50 percentage point reduction for rate year 2011. Section
1886(m)(3)(B) of the Act provides that the application of paragraph 3
of 1886(m) of the Act may result in the annual update being less than
zero for a rate year, and may result in payment rates for a rate year
being less than such payment rates for the

[[Page 30969]]

preceding rate year. Furthermore, section 3401(p) of Public Law 111-148
specifies that the amendments made by section 3401(c) of Public Law
111-148 shall not apply to discharges occurring before April 1, 2010.
We note that in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed
rule, since the annual update to the LTCH PPS policies, rates and
factors now occurs on October 1st, we proposed to adopt the term
``fiscal year'' (FY) rather than ``rate year'' (RY) under the LTCH PPS
beginning October 1, 2010 to conform with the standard definition of
the Federal fiscal year (October 1 through September 30) used by other
PPSs, such as the IPPS (see 75 FR 24046 through 24027). Consequently,
in that proposed rule and in this supplemental proposed rule, for
purposes of clarity, when discussing the annual update for the LTCH
PPS, we employed ``FY'' rather than ``RY'' because it is our intent
that the phrase ``FY'' be used prospectively in all circumstances
dealing with the LTCH PPS. Similarly, although the language of section
3401(c) of Public Law 111-148 and section 10319 of Public Law 111-148,
and section 1105(b) of Public Law 111-152 refer to years 2010 and
thereafter under the LTCH PPS as ``rate year,'' consistent with our
proposal to change the terminology used under the LTCH PPS from ``rate
year'' to ``fiscal year,'' for purposes of clarity, in this
supplemental proposed rule, when discussing the annual update for the
LTCH PPS, including the provisions of the Affordable Care Act, we will
continue to employ ``FY'' rather than ``RY'' for 2011 and subsequent
years because it is our intent that ``FY'' be used prospectively in all
circumstances dealing with the LTCH PPS.
3. Proposed Change to Reflect the Market Basket Update for LTCHs for RY
2010 (Sec. 412.523(c)(vi))
In the FY 2010 IPPS/RY 2010 LTCH PPS final rule appearing in the
Federal Register on August 27, 2009 (74 FR 43754), we established
policies, payment rates and factors for determining payments under the
LTCH PPS for RY 2010 (October 1, 2009 through September 30, 2010). The
provisions of the Affordable Care Act affect some of the policies,
payment rates and factors for determining payments under the LTCH PPS
for RY 2010 (some of which are discussed elsewhere in this supplemental
proposed rule). In a separate notice published elsewhere in this
Federal Register, we establish revised RY 2010 LTCH PPS rates and
factors consistent with the provisions of section 1886(m)(3) of the Act
as added by section 3401(c) of Public Law 111-148, and section
1886(m)(4) of the Act as added by section 3401(c) of Public Law 111-148
and amended by section 10319(b) of Public Law 111-148, as further
amended by section 1105(b) of Public Law 111-152, as well as section
3401(p) of the Public Law 111-148. Section 1886(m)(3)(A)(ii) of the Act
provides for each of RYs 2010 through 2019, the annual update to the
standard Federal rate is reduced by the ``other adjustment'' described
in section 1886(m)(4) of the Act. Specifically, sections
1886(m)(3)(A)(ii) and (4)(A) of the Act require a 0.25 percentage point
reduction to the annual update to the standard Federal rate for RY
2010. Section 1886(m)(3)(A) of the Act on its face explicitly provides
for a revised annual update to the standard Federal rate beginning RY
2010, thus resulting in a single revised RY 2010 standard Federal rate.
Section 3401(p) of the Public Law 111-148 provides that,
notwithstanding the previous provisions of this section, the amendments
made by subsections (a), (c) and (d) shall not apply to discharges
occurring before April 1, 2010. When read in conjunction we believe
section 1886(m)(3)(A) of the Act and section 3401(p) of Public Law 111-
148 provide for a single revised RY 2010 standard Federal rate;
however, for payment purposes, discharges occurring on or after October
1, 2009 and before April 1, 2010, simply will not be based on the
revised RY 2010 standard Federal rate.
As discussed in a separate notice published elsewhere in this
Federal Register, consistent with our historical practice and the
methodology used in the FY 2010 IPPS/RY 2010 final rule, we establish
an update to the LTCH PPS standard Federal rate for RY 2010 of 1.74
percent. This annual update for RY 2010 is based on the full forecasted
estimated increase in the LTCH PPS market basket for RY 2010 of 2.5
percent, adjusted by the 0.25 percentage point reduction required by
sections 1886(m)(3)(A)(ii) and (4)(A) of the Act, and an adjustment to
account for the increase in case-mix in a prior period (FY 2007)
resulting from changes in documentation and coding practices of -0.5
percent. Therefore, in this supplemental proposed rule, under the
authority of sections 1886(m)(3)(A)(ii) and (4)(A) of the Act, we are
proposing to amend Sec. 412.523(c)(3)(vi) to specify that the standard
Federal rate for the LTCH PPS rate year beginning October 1, 2009 and
ending September 30, 2010, is the standard Federal rate for the
previous rate year updated by 1.74 percent. Furthermore, consistent
with section 3401(p) of Public Law 111-148, we are also proposing to
revise Sec. 412.523(c)(3)(vi) to specify that with respect to
discharges occurring on or after October 1, 2009 and before April 1,
2010, payments are based on the standard Federal rate in Sec.
412.523(c)(v) updated by 2.0 percent (that is, a standard Federal rate
of $39,896.65 (see 74 FR 44022)). We note that the provisions of the
law that add sections 1886(m)(3) and (4) of the Act are self-
implementing and in this supplemental proposed rule, we are proposing
to incorporate existing law regarding the 0.25 percentage point
reduction to the annual update to the standard Federal rate for RY 2010
(including the application of the revised standard Federal rate that
reflects that 0.25 percentage point reduction in making payments for
discharges on or after April 1, 2010) into the regulations at Sec.
412.529(c)(3)(vi) to reflect this required policy change.
4. Proposed Market Basket Update for LTCHs for FY 2011
As discussed in section VII.C.2. of the preamble of the May 4, 2010
FY 2011 IPPS/LTCH PPS proposed rule, we are proposing to continue to
use the FY 2002-based rehabilitation, psychiatric, long-term care (RPL)
hospital market basket under the LTCH PPS for FY 2011. Also, in that
proposed rule, we stated that at this time, the most recent estimate of
the increase in the proposed LTCH PPS market basket (that is, the FY
2002-based RPL market basket) for FY 2011 is 2.4 percent. This increase
is based on IHS Global Insight, Inc.'s first quarter 2010 forecast,
with historical data through the 2009 fourth quarter, of the FY 2002-
based RPL market basket increase. Since publication of the May 4, 2010
FY 2011 IPPS/LTCH PPS proposed rule our estimate of the FY 2002-based
RPL market basket for FY 2011 has not changed. Furthermore, as also
stated in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule,
consistent with our historical practice of using market basket
estimates based on the most recent available data, we propose that if
more recent data are available when we develop the final rule, we would
use such data, if appropriate.
Section 1886(m)(3)(A)(ii) of the Act as added by section 3401(c) of
Public Law 111-148 specifies that for each of RYs 2010 through 2019,
any annual update to the standard Federal rate shall be reduced by the
other adjustment specified in new section 1886(m)(4) of the Act.
Furthermore, section 1886(m)(3)(A)(i) of the Act specifies that

[[Page 30970]]

for rate year 2012 and each subsequent rate year, any annual update to
the standard Federal rate shall be reduced by the productivity
adjustment described in section 1866(b)(3)(B)(xi)(II) of the Act.
For FY 2011, section 1886(m)(4)(B) of the Act as added by section
3401(c) of Public Law 111-148, as amended by section 10319 of Public
Law 111-148 and as further amended by section 1105(b) of Public Law
111-152, requires a 0.50 percentage point reduction to the annual
update to the standard Federal rate for rate year 2011. Consequently,
the proposed market basket update under the LTCH PPS for FY 2011 is 1.9
percent (that is, the most recent estimate of the LTCH PPS market
basket of 2.4 percent minus the 0.50 percentage points required in
section 1886(m)(4)(B) of the Act. Again, we note that consistent with
our historical practice of using market basket estimates based on the
most recent available data, we propose that if more recent data are
available when we develop the final rule, we would use such data, if
appropriate, in determining the final market basket update under the
LTCH PPS for FY 2011. (We note that in section III.A. of the Addendum
to this supplemental proposed rule, for FY 2011, we are proposing to
update the LTCH PPS standard Federal rate by -0.59 percent. This
proposed update reflects proposed market basket update under the LTCH
PPS for FY 2011 (of 1.9 percent as discussed above) and a proposed
adjustment to account for the increase in case-mix in the prior periods
that resulted from changes in documentation and coding practices rather
than increases in patients' severity of illness (discussed in section
VII.C.3. of the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS
proposed rule).)
5. Proposed Medicare Severity Long-Term Care Diagnosis-Related Group
(MS-LTC-DRG) Relative Weights
As discussed above, the proposed LTCH PPS policies and payment
rates in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule do not
reflect the provisions of the Affordable Care Act. The revised proposed
standard Federal rate for FY 2011 that incorporates the ``other
adjustment'' required in section 1886(m)(3)(A)(ii) as amended and
described in section 1886(m)(4) as amended is discussed in section
III.A. of the Addendum of this supplemental proposed rule. This
revision to the proposed standard Federal rate for FY 2011 requires us
to revise the proposed relative weights for the MS-LTC-DRGs for FY
2011. This is the case since our established methodology for updating
the annual update to the MS-LTC-DRG classifications and relative
weights in a budget neutral manner requires that estimated aggregate
LTCH PPS payments would be unaffected. That is, under the budget
neutrality requirement estimated aggregate LTCH PPS payments would be
neither greater than nor less than the estimated aggregate LTCH PPS
payments that would have been made without the MS-LTC-DRG
classification and relative weight changes.
As discussed in section VII.B.3.g. (step 7) of the preamble of the
May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24042 through
24043), we proposed to use our established two-step budget neutrality
methodology. In the first step of our MS-LTC-DRG budget neutrality
methodology, we calculate and apply a normalization factor to the
proposed recalibrated relative weights to ensure that estimated
payments are not influenced by changes in the composition of case types
or the changes to the classification system. That is, the normalization
adjustment is intended to ensure that the recalibration of the proposed
MS-LTC-DRG relative weights (that is, the process itself) neither
increases nor decreases the average case-mix index (CMI). The
normalization factor is calculated using the ratio average CMIs (that
is, the average MS-LTC-DRG relative weight) and is independent of the
standard Federal rate. (We refer readers to the FY 2011 IPPS/LTCH PPS
proposed rule for additional details on the proposed calculation of the
normalization factor applied used in determining the proposed FY 2011
MS-LTC-DRG relative weights (75 FR 24042 through 24043).) Therefore,
this step was not revised for this supplemental proposed rule. However,
in the second step of our established two-step budget neutrality
methodology (described in section VII.B.3.g. (step 7) of the preamble
of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule), for FY 2011 we
proposed to determine a budget neutrality adjustment factor based on
simulating estimated total LTCH PPS payments. Consequently, revising
the standard Federal rate to reflect the provisions of newly added
sections 1886(m)(3)(A)(ii) and (4) of the Act would impact the
estimated aggregated LTCH PPS payments upon which we determine the
proposed budget neutrality factor applied in determining the proposed
FY 2011 MS-LTC-DRG relative weights.
For this supplemental proposed rule, consistent with the proposed
methodology described in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed
rule (75 FR 24042 through 24043), we are proposing to apply a budget
neutrality adjustment factor of 0.987632 in determining the proposed FY
2011 MS-LTC-DRG relative weights, which was determined based on
payments simulations after using the proposed FY 2011 standard Federal
rate that reflects the reductions required by sections
1886(m)(3)(A)(ii) and (4)(A) and (B) of the Act (discussed above) and
LTCH claims from the December 2009 update of the FY 2009 MedPAR files
(that is the same data used in the May 4, 2010 FY 2011 IPPS/LTCH PPS
proposed rule). Specifically, we determined the proposed FY 2011 budget
neutrality adjustment factor using the following three steps: (2.a.) we
simulate estimated total LTCH PPS payments using the normalized
proposed relative weights for FY 2011 and GROUPER Version 28.0 (as
described above); (2.b.) we simulate estimated total LTCH PPS payments
using the FY 2010 GROUPER (Version 27.0) and the FY 2010 MS-LTC-DRG
relative weights shown in Table 11 of the FY 2010 IPPS/RY 2010 LTCH PPS
final rule (74 FR 44183 through 44192); and (2.c.) we calculate the
ratio of these estimated total LTCH PPS payments by dividing the
estimated total LTCH PPS payments using the FY 2010 GROUPER (Version
27.0) and the FY 2010 MS-LTC-DRG relative weights (determined in step
2.b.) by the estimated total LTCH PPS payments using the proposed FY
2011 GROUPER (Version 28.0) and the normalized proposed MS-LTC-DRG
relative weights for FY 2011 (determined in Step 2.a.).
Therefore, under our established two-step budget neutrality
methodology, in determining the proposed FY 2011 MS-LTC-DRG relative
weights, each normalized proposed relative weight (determined as
described in section VII.C.3.g.(step 7) of the preamble of the May 4,
2010 FY 2011 IPPS/LTCH PPS proposed rule) is multiplied by a budget
neutrality factor of 0.987632 in the second step of the budget
neutrality methodology to determine the proposed budget neutral FY
2011. (We note that in determining the proposed FY 2011 budget neutral
MS-LTC-DRG relative weights for this supplemental proposed rule, with
the exception of the proposed budget neutrality adjustment factor of
0.987632 discussed above, we used the proposed methodology as presented
in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24042
through 24043).) Consistent with our historical policy of using the
best available data, we are proposing to use the most recent available
data for

[[Page 30971]]

determining the budget neutrality adjustment factor in the final rule.
Accordingly, in determining the proposed FY 2011 MS-LTC-DRG
relative weights in Table 11 in the Addendum to this supplemental
proposed rule, consistent with our existing methodology, we are
proposing to apply a normalization factor of 1.10362 (computed as
described in section VII.C.3.g. (step 7) of the preamble to the May 4,
2010 FY 2011 IPPS/LTCH PPS proposed rule) and a budget neutrality
factor of 0.987632 (computed as described above). Table 11 in the
Addendum to this supplemental proposed rule lists the proposed MS-LTC-
DRGs and their respective proposed relative weights, geometric mean
length of stay, and five-sixths of the geometric mean length of stay
(used in determining SSO payments under Sec. 412.529) for FY 2011. (We
note that there are no changes to the geometric mean length of stay and
five-sixths of the geometric mean length of stay that were published in
Table 11 of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule as the
calculation of these statistics is independent of the standard Federal
rate.)

III. Other Required Information

A. Collection of Information Requirements

This document does not impose information collection and
recordkeeping requirements. Consequently, it need not be reviewed by
the Office of Management and Budget under the authority of the
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35).

B. Waiver of 60-Day Comment Period

We ordinarily publish a notice of proposed rulemaking in the
Federal Register and permit a 60-day comment period, as provided in
section 1871(b)(1) of the Act. This period, however, may be shortened,
as provided under section 1871(b)(2)(C) of the Act, when the Secretary
finds good cause that a 60-day comment period would be impracticable,
unnecessary, or contrary to the public interest and incorporates a
statement of the finding and its reasons in the rule issued. For this
supplemental proposed rule, we are waiving the 60-day comment period
for good cause and allowing a comment period that coincides with the
comment period provided for on the FY 2011 IPPS/LTCH PPS proposed rule
(75 FR 23852).
As we explained in the FY 2011 IPPS/LTCH PPS proposed rule (75 FR
23859), due to the timing of the enactment of Public Law 111-148 and
Public Law 111-152, the policies and payment rates outlined in the
proposed rule did not reflect the changes made by either law to the
IPPS and LTCH PPS. This supplemental proposed rule addresses the
changes that affect our proposed policies and payment rates for FY 2011
under the IPPS and the LTCH PPS.
A 60-day comment period on this supplemental proposed rule would be
both impracticable and contrary to the public interest because it would
not allow for coordinated consideration of the comments on this
supplemental proposed rule with those on the FY 2011 IPPS/LTCH PPS
proposed rule. Because the issues raised in this supplemental proposed
rule are integral to our consideration of comments on certain proposals
in the FY 2011 IPPS/LTCH PPS proposed rule, we do not believe it would
be appropriate to review comments on the issues raised in this
supplemental proposed rule in isolation from the comments received on
the FY 2011 IPPS/LTCH PPS proposed rule. We further note that a full
60-day comment period would end on a date that would not allow the
agency sufficient time to process the comments and respond to them in a
meaningful manner by the August 1, 2010 date for issuing the final
rule. If we allowed for a full 60-day comment period, timely filed
comments would receive a shorter period of time for consideration by
the agency, and the agency would be left with insufficient time to
properly respond to comments and appropriately resolve whether any of
the proposed policies should be modified in light of comments received.
For all of these reasons, we find good cause to waive the 60-day
comment period for this rule of proposed rulemaking, and we are instead
providing for a comment period that coincides with the comment period
provided for the FY 2011 IPPS/LTCH PPS proposed rule that appeared in
the May 4, 2010 Federal Register.

IV. Response to Comments

Because of the large number of public comments we normally receive
on Federal Register documents, we are not able to acknowledge or
respond to them individually. We will consider all comments we receive
by the date and time specified in the DATES section of this preamble,
and, when we proceed with a subsequent document, we will respond to the
comments in the preamble to that document.

List of Subjects

42 CFR Part 412

Administrative practice and procedure, Health facilities, Medicare,
Puerto Rico, Reporting and recordkeeping requirements.

42 CFR Part 413

Health facilities, Kidney diseases, Medicare, Puerto Rico,
Reporting and recordkeeping requirements.

For the reasons stated in the preamble of this proposed rule, the
Centers for Medicare & Medicaid Services is proposing to amend 42 CFR
chapter IV as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL
SERVICES

1. The authority citation for part 412 continues to read as
follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh), and sec. 124 of Public Law 106-113 (113
Stat. 1501A-332).

Sec. 412.23 [Amended]

2. In Sec. 412.23, paragraphs (e)(6)(i) and (e)(7)(ii) are amended
by removing the date ``December 28, 2010'' and adding the date
``December 28, 2012'' in its place.
3. Section 412.64 is amended by--
A. Revising paragraphs (d)(1) and (e)(4).
B. Adding a new paragraph (m).

Sec. 412.64 Federal rates for inpatient operating costs for Federal
fiscal year 2005 and subsequent fiscal years.

* * * * *
(d) Applicable percentage change for fiscal year 2005 and for
subsequent fiscal years.
(1) Subject to the provisions of paragraph (d)(2) of this section,
the applicable percentage change for updating the standardized amount
is--
(i) For fiscal year 2005 through fiscal year 2009, the percentage
increase in the market basket index for prospective payment hospitals
(as defined in Sec. 413.40(a) of this subchapter) for hospitals in all
areas.
(ii) For fiscal year 2010, for discharges--
(A) On or after October 1, 2009 and before April 1, 2010, the
percentage increase in the market basket index for prospective payment
hospitals (as defined in Sec. 413.40(a) of this subchapter) for
hospitals in all areas; and
(B) On or after April 1, 2010 and before October 1, 2010, the
percentage increase in the market basket index minus 0.25 percentage
points for

[[Page 30972]]

prospective payment hospitals (as defined in Sec. 413.40(a) of this
subchapter) for hospitals in all areas.
(iii) For fiscal year 2011, the percentage increase in the market
basket index minus 0.25 percentage points for prospective payment
hospitals (as defined in Sec. 413.40(a) of this subchapter) for
hospitals in all areas.
* * * * *
(e) * * *
(4) CMS makes an adjustment to the wage index to ensure that
aggregate payments after implementation of the rural floor under
section 4410 of the Balanced Budget Act of 1997 (Pub. L. 105-33) and
the imputed floor under paragraph (h)(4) of this section are equal to
the aggregate prospective payments that would have been made in the
absence of such provisions as follows:
(i) Beginning October 1, 2008, such adjustment is transitioned from
a nationwide to a statewide adjustment as follows:
(A) From October 1, 2008 through September 30, 2009, the wage index
is a blend of 20 percent of a wage index with a statewide adjustment
and 80 percent of a wage index with a nationwide adjustment.
(B) From October 1, 2009 through September 30, 2010, the wage index
is a blend of 50 percent of a wage index with a statewide adjustment
and 50 percent of a wage index with a nationwide adjustment.
(ii) Beginning October 1, 2010, such adjustment is a full
nationwide adjustment.
* * * * *
(m) Adjusting the wage index to account for the Frontier State
floor.
(1) General criteria. For discharges occurring on or after October
1, 2010, CMS adjusts the hospital wage index for hospitals located in
qualifying States to recognize the wage index floor established for
frontier States. A qualifying frontier State meets both of the
following criteria:
(i) At least 50 percent of counties located within the State have a
reported population density less than 6 persons per square mile.
(ii) The State does not receive a non-labor related share
adjustment determined by the Secretary to take into account the unique
circumstances of hospitals located in Alaska and Hawaii.
(2) Amount of wage index adjustment. A hospital located in a
qualifying State will receive a wage index value not less than 1.00.
(3) Process for determining and posting wage index adjustments. (i)
CMS uses the most recent Population Estimate data published by the U.S.
Census Bureau to determine county definitions and population density.
This analysis will be periodically revised, such as for updates to the
decennial census data.
(ii) CMS will include a listing of qualifying Frontier States and
denote the hospitals receiving a wage index increase attributable to
this provision in its annual updates to the hospital inpatient
prospective payment system published in the Federal Register.
4. Section 412.73 is amended by--
A. Revising paragraph (c)(15).
B. Adding a new paragraph (c)(16).
The revision and addition read as follows:

Sec. 412.73 Determination of the hospital specific rate based on a
Federal fiscal year 1982 base period.

* * * * *
(c) * * *
(15) For Federal fiscal year 2003 through Federal fiscal year 2009.
For Federal fiscal year 2003 through Federal fiscal year 2009, the
update factor is the percentage increase in the market basket index for
prospective payment hospitals (as defined in Sec. 413.40(a) of this
chapter).
(16) For Federal fiscal year 2010 and subsequent years. For Federal
fiscal year 2010 and subsequent years, the update factor is the
percentage increase specified in Sec. 412.64(d).
* * * * *

Sec. 412.75 [Amended]

5. In Sec. 412.75, paragraph (d) is amended by removing the
citation ``Sec. 412.73(c)(15)'' and adding the citation ``Sec.
412.73(c)(15) and Sec. 412.73(c)(16)'' in its place.

Sec. 412.77 [Amended]

6. In Sec. 412.77, paragraph (e) is amended by removing the
reference ``(c)(15)'' and adding the reference ``(c)(16)'' in its
place.

Sec. 412.78 [Amended]

7. In Sec. 412.78, paragraph (e) is amended by removing the
citation ``Sec. 412.73(c)(15)'' and adding the citation ``Sec.
412.73(c)(15) and Sec. 412.73(c)(16)'' in its place.

Sec. 412.79 [Amended]

8. In Sec. 412.79, paragraph (d) is amended by removing the phrase
``and (c)(15)'' and adding the phrase ``through (c)(16)'' in its place.
9. Section 412.101 is revised to read as follows:

Sec. 412.101 Special treatment: Inpatient hospital payment adjustment
for low-volume hospitals.

(a) Definitions. Beginning in FY 2011, the terms used in this
section are defined as follows:
Medicare discharges means discharge of inpatients entitled to
Medicare Part A, including discharges associated with individuals whose
inpatient benefits are exhausted or whose stay was not covered by
Medicare and also discharges of individuals enrolled in a MA
organization under Medicare Part C.
Road miles means ``miles'' as defined in Sec. 412.92(c)(1).
(b) General considerations. (1) CMS provides an additional payment
to a qualifying hospital for the higher incremental costs associated
with a low volume of discharges. The amount of any additional payment
for a qualifying hospital is calculated in accordance with paragraph
(c) of this section.
(2) In order to qualify for this adjustment a hospital must meet
the following criteria:
(i) For FY 2005 through FY 2010, a hospital must have less than 200
total discharges, which includes Medicare and non-Medicare discharges,
during the fiscal year, as reflected in its cost report specified in
paragraph (b)(3) of this section, and be located more than 25 road
miles (as defined in paragraph (a) of this section from the nearest
``subsection (d)'' (section 1886(d) of the Act) hospital.
(ii) For FY 2011 and FY 2012, a hospital must have less than 1,600
Medicare discharges, as defined in paragraph (a) of this section,
during the fiscal year, as reflected in its cost report specified in
paragraph (b)(3) of this section, and be located more than 15 road
miles, as defined in paragraph (a) of this section, from the nearest
``subsection (d)'' (section 1886(d) of the Act) hospital.
(iii) For FY 2013 and subsequent fiscal years, a hospital must have
less than 200 total discharges, which includes Medicare and non-
Medicare, during the fiscal year, as reflected in its cost report
specified in paragraph (b)(3) of this section, and be located more than
25 road miles as defined in paragraph (a) of this section from the
nearest ``subsection (d)'' (section 1886(d) of the Act) hospital.
(3) The fiscal intermediary or Medicare administrative contractor
makes the determination of the discharge count for purposes of
determining a hospital's qualification for the adjustment based on the
hospital's most recently submitted cost report and for qualification
for FYs 2011 and 2012 other documentation of

[[Page 30973]]

Medicare discharges (as defined in paragraph (a) of this section).
(4) In order to qualify for the adjustment, a hospital must provide
its fiscal intermediary or Medicare administrative contractor with
sufficient evidence that it meets the distance requirement specified
under paragraph (b)(2) of this section. The fiscal intermediary or
Medicare administrative contractor will base its determination of
whether the distance requirement is satisfied upon the evidence
presented by the hospital and other relevant evidence, such as maps,
mapping software, and inquiries to State and local police,
transportation officials, or other government officials.
(c) Determination of the adjustment amount. The low-volume
adjustment for hospitals that qualify under paragraph (b) of this
section are as follows for the applicable fiscal year:
(1) For FY 2005 through FY 2010, the adjustment is 25 percent for
each Medicare discharge.
(2) For FY 2011 and FY 2012, the adjustment is as follows:

------------------------------------------------------------------------
Payment
adjustment
Medicare discharge range (percent add-
on)
------------------------------------------------------------------------
1-200..................................................... 25.0000
201-301................................................... 23.3333
301-400................................................... 21.6667
401-500................................................... 20.0000
501-600................................................... 18.3333
601-700................................................... 16.6667
701-800................................................... 15.0000
801-900................................................... 13.3333
901-1,000................................................. 11.6667
1,001-1,100............................................... 10.0000
1,101-1,200............................................... 8.3333
1,201-1,300............................................... 6.6667
1,301-1,400............................................... 5.0000
1,401-1,500............................................... 3.3333
1,501-1,599............................................... 1.6667
1,600 or more............................................. 0.0000
------------------------------------------------------------------------

(3) For FY 2013 and subsequent years, the adjustment is 25 percent
for each Medicare discharge.
(d) Eligibility of new hospitals for the adjustment. A new hospital
will be eligible for a low-volume adjustment under this section once it
has submitted a cost report for a cost reporting period that indicates
that it meets discharge requirements during the applicable fiscal year
and has provided its fiscal intermediary or Medicare administrative
contractor with sufficient evidence that it meets the distance
requirement, as specified under paragraph (b)(2) of this section.

Sec. 412.108 [Amended]

10. Section 412.108 is amended as follows:
A. In paragraph (a)(1) introductory text the phrase ``before
October 1, 2011'' is removed and the phrase ``before October 1, 2012''
is added in its place.
B. In paragraph (c)(2)(iii) introductory text the phrase ``before
October 1, 2010'' is removed and the phrase ``before October 1, 2012''
is added in its place.
11. Section 412.211 is amended by revising paragraph (c) to read as
follows:

Sec. 412.211 Puerto Rico rates for Federal fiscal year 2004 and
subsequent fiscal years.

* * * * *
(c) Computing the standardized amount. CMS computes a Puerto Rico
standardized amount that is applicable to all hospitals located in all
areas. The applicable percentage change for updating the Puerto Rico
specific standardized amount is as follows:
(1) For fiscal year 2004 through fiscal year 2009, increased by the
applicable percentage change specified in Sec. 412.64(d)(1)(ii)(A).
(2) For fiscal year 2010, increased by the market basket index for
prospective payment hospitals (as defined in Sec. 413.40(a) of this
subchapter) for hospitals in all areas.
(3) For fiscal year 2011, increased by the applicable percentage
change specified in Sec. 412.64(d)(1)(iii).
* * * * *

Sec. 412.230 [Amended]

12. In Sec. 412.230 paragraph (d)(1)(iv)(E) is amended by removing
the figures ``86'' and ``88'' adding the figures ``82'' and ``84'' in
their place, respectively.

Sec. 412.232 [Amended]

13. In Sec. 412.232, paragraph (c)(3) is amended by removing the
figure ``88'' and adding the figure ``85'' in its place.

Sec. 412.234 [Amended]

14. In Sec. 412.234, paragraph (b)(3) is amended by removing the
figure ``88'' and adding the figure ``85'' in its place.

Sec. 412.523 [Amended]

15. Section 412.523 is amended as follows:
A. Revise paragraph (c)(3)(vi).
B. Add paragraph (c)(3)(vii).
C. Paragraph (d)(3) is amended by removing the phrase ``December
29, 2010, and by no later than October 1, 2012'' and adding the phrase
``December 29, 2012,'' in its place.
The revision and addition read as follows:

Sec. 412.523 Methodology for calculating the Federal prospective
payment rates.

* * * * *
(c) * * *
(3) * * *
(vi) For long-term care hospital prospective payment system rate
year beginning October 1, 2009 and ending September 30, 2010. (A) The
standard Federal rate for long-term care hospital prospective payment
system rate year beginning October 1, 2009 and ending September 30,
2010 is the standard Federal rate for the previous long-term care
hospital prospective payment system rate year updated by 1.74 percent.
The standard Federal rate is adjusted, as appropriate, as described in
paragraph (d) of this section.
(B) With respect to discharges occurring on or after October 1,
2009 and before April 1, 2010, payments are based on the standard
Federal rate in paragraph (c)(3)(v) of this section updated by 2.0
percent.
(vii) For long-term care hospital prospective payment system fiscal
year beginning October 1, 2010, and ending September 30, 2011. The
standard Federal rate for the long-term care hospital prospective
payment system fiscal year beginning October 1, 2010, and ending
September 30, 2011, is the standard Federal rate for the previous long-
term care hospital prospective payment system rate year updated by -
0.59 percent. The standard Federal rate is adjusted, as appropriate, as
described in paragraph (d) of this section.
* * * * *

Sec. 412.529 [Amended]

16. In Sec. 412.529, paragraphs (c)(2) introductory text and
(c)(3) introductory text are amended by removing the date ``December
29, 2010'' and adding in its place the date ``December 29, 2012'' each
time it appears.

Sec. 412.534 [Amended]

17. Section 412.534 is amended as follows:
A. Paragraphs (c)(1), (c)(2), (d)(1), (d)(2), (e)(1), (e)(2) are
amended by removing the date ``October 1, 2010'' and adding in its
place the date ``October 1, 2012'' each time it appears.
B. Paragraphs (c)(3), (d)(3), (e)(3), (h)(4), and (h)(5) are
amended by removing the date ``July 1, 2010'' and adding in its place
the date ``July 1, 2012'' each time it appears.

Sec. 412.536 [Amended]

18. In Sec. 412.536, paragraph (a)(2) introductory text is amended
by removing the date ``July 1, 2010'' and adding the date ``July 1,
2012'' in its place.

[[Page 30974]]

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR
END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED
PAYMENT RATES FOR SKILLED NURSING FACILITIES

19. The authority citation for part 413 continues to read as
follows:

Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and
(n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act
(42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n),
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); and sec. 124 of
Public Law 106-133 (113 Stat. 1501A-332).

20. Section 413.70 is amended as follows:
A. Revise paragraph (b)(3)(ii)(A).
B. Redesignate paragraph (b)(5)(i) as (b)(5)(i)(A).
C. In newly redesignated paragraph (b)(5)(i)(A), the phrase ``on or
after December 21, 2000,'' is removed and the phrase ``on or after
December 21, 2000 and on or before December 31, 2003,'' is added in its
place.
D. Add a new paragraph (b)(5)(i)(B).
The revision and addition read as follows:

Sec. 413.70 Payment for services of a CAH.

* * * * *
(b) * * *
(3) * * *
(ii) * * *
(A) Effective for cost reporting periods beginning on or after
January 1, 2004, for facility services not including any services for
which payment may be made under paragraph (b)(3)(ii)(B) of this
section, 101 percent of the reasonable costs of the services as
determined under paragraph (b)(2)(i) of this section; and
* * * * *
(5) * * *
(i) * * *
(B) Effective for cost reporting periods beginning on or after
January 1, 2004, payment for ambulance services furnished by a CAH or
an entity that is owned and operated by a CAH is 101 percent of the
reasonable costs of the CAH or the entity in furnishing those services,
but only if the CAH or the entity is the only provider or supplier of
ambulance services located within a 35-mile drive of the CAH or the
entity.
* * * * *

Authority:
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

Dated: May 13, 2010.
Marilyn Tavenner,
Acting Administrator, Centers for Medicare & Medicaid Services.
Approved: May 18, 2010.
Kathleen Sebelius,
Secretary.

Note: The following Addendum and Appendix will not appear in the
Code of Federal Regulations.

Addendum: FY 2011 Supplemental Proposed Payment Rates

I. Supplemental Proposed FY 2011 Prospective Payment Systems Payment
Rates for Hospital Inpatient Operating and Capital Related Costs

As discussed in section II.B. of the preamble to this
supplemental proposed rule, changes to the applicable percentage
increase, wage index, and rural community hospital demonstration
mandated by the Affordable Care Act necessitate the recalculation of
the FY 2011 proposed budget neutrality factors, outlier threshold
and standardized amounts. In the FY 2011 IPPS/LTCH PPS proposed rule
we explained our methodology for calculating the FY 2011 proposed
budget neutrality factors (75 FR 24062 through 24073). Except as
explained below, we apply this same methodology in recalculating
these budget neutrality adjustments to reflect the changes to the
standardized amount required by the Affordable Care Act. A complete
discussion of our computation of the FY 2011 proposed budget
neutrality factors, outlier threshold and standardized amounts is
found below.

A. Updating the Average Standardized Amounts

As discussed section II.B. of the preamble to this supplemental
proposed rule, sections 3401(a) and section 10319(a) of Public Law
111-148, amends section 1886(b)(3)(B)(i) of the Act to provide that
the FY 2011 applicable percentage increase for IPPS hospitals equals
the rate-of-increase in the hospital market basket for IPPS
hospitals in all areas minus a 0.25 percentage point, subject to the
hospital submitting quality information under rules established by
the Secretary in accordance with section 1886(b)(3)(B)(viii) of the
Act. For hospitals that fail to submit quality data consistent with
section 1886(b)(3)(B)(viii) of the Act, the update is equal to the
market basket percentage increase minus a 0.25 percentage point less
an additional 2.0 percentage points. Therefore, for this
supplemental proposed rule, based on IHS Global Insight, Inc.'s
first quarter 2010 forecast of the FY 2011 market basket increase,
the estimated update to the FY 2011 operating standardized amount is
2.15 percent (that is, the FY 2011 estimate of the market basket
rate-of-increase of 2.4 percent minus 0.25 percentage points) for
hospitals in all areas, provided the hospital submits quality data
in accordance with our rules. For hospitals that do not submit
quality data, the estimated update to the operating standardized
amount is 0.15 percent (that is, the adjusted FY 2011 estimate of
the market basket rate-of-increase of 2.15 percent minus 2.0
percentage points).

B. Proposed Budget Neutrality Adjustments Factors for Recalibration
of DRG Weights and Updated Wage Index

In the FY 2011 IPPS/LTCH PPS proposed rule we explained our
methodology for calculating the FY 2011 proposed DRG
reclassification and recalibration and updated wage index budget
neutrality factor (75 FR 24064). Except as explained below, we apply
this same methodology in recalculating this budget neutrality
adjustment to reflect the changes to the standardized amount
required by the Affordable Care Act.
As discussed above, sections 3401(a) and section 10319(a) of
Public Law 111-148 amends section 1886(b)(3)(B)(i) of the Act, which
defines the applicable percentage increase. Although these
amendments modify the applicable percentage increase applicable to
the FY 2010 rates under the IPPS, section 3401(p) of Public Law 111-
148 states that the amendments do not apply to discharges occurring
prior to April 1, 2010. Accordingly, for purposes of determining
payment amounts for discharges occurring on or after April 1, 2010,
in order to comply with the statute in section 3401(p) of Public Law
111-148, we applied the revised FY 2010 rates effective with
discharges on or after April 1, 2010 until the end of FY 2010.
However, for purposes of determining the budget neutrality
adjustments for FY 2011, the statute requires us to simulate the FY
2010 hospital as if hospitals were paid for all of FY 2010 based on
the FY 2010 rates that are effective for payments for discharges
occurring on or after April 1, 2010.
For FY 2011 we are proposing a proposed DRG reclassification and
recalibration factor of 0.996867 and a proposed budget neutrality
factor of 1.000070 for changes to the wage index. We multiplied the
proposed DRG reclassification and recalibration budget neutrality
factor of 0.996867 by the proposed budget neutrality factor of
1.000070 for changes to the wage index to determine the proposed DRG
reclassification and recalibration and updated wage index budget
neutrality factor of 0.996937 (as required by sections
1886(d)(4)(C)(iii) and 1886(d)(3)(E)(i) of the Act).

C. Reclassified Hospitals--Budget Neutrality Adjustment

Due to the Affordable Care Act, it is also necessary to revise
the reclassification budget neutrality factor. As discussed in
section II.A. of the preamble to this supplemental proposed rule,
section 3137(c) of Public Law 111-148 revised the average hourly
wage standards resulting in our estimate that 23 additional
hospitals will be reclassified (or receive their primary
reclassifications. Using the methodology proposed in the FY 2011
IPPS proposed rule, and incorporating the provision above, we
computed a factor of 0.991476 for reclassification budget
neutrality, as required by section 1886(d)(8)(D) of the Act.

[[Page 30975]]

D. Rural and Imputed Floor Budget Neutrality

We make an adjustment to the wage index to ensure that aggregate
payments after implementation of the rural floor under section 4410
of the BBA (Pub. L. 105-33) and the imputed floor under Sec.
412.64(h)(4) of the regulations are made in a manner that ensures
that aggregate payments to hospitals are not affected. As discussed
in section III.B. of the preamble of the FY 2009 IPPS final rule (73
FR 48570 through 48574), we adopted as final State level budget
neutrality for the rural and imputed floors, effective beginning
with the FY 2009 wage index. In response to the public's concerns
and taking into account the potentially significant payment cuts
that could occur to hospitals in some States if we implemented this
change with no transition, we decided to phase in, over a 3-year
period, the transition from the national rural floor budget
neutrality adjustment on the wage index to the State level rural
floor budget neutrality adjustment on the wage index. In FY 2011
IPPS/LTCH PPS proposed rule, in the absence of provisions of Public
Law 111-148, the proposed adjustment would have been completely
transitioned to the State level methodology, such that the wage
index that was proposed in the FY 2011 IPPS/LTCH PPS proposed rule
was determined by applying 100 percent of the State level budget
neutrality adjustment. However, section 3141 of Public Law 111-148
restores the budget neutrality adjustment for the rural and imputed
floors to a uniform, national adjustment, beginning with the FY 2011
wage index.
Using the same methodology in prior final rules to calculate the
national rural and imputed floor budget neutrality adjustment factor
(which was part of the methodology to calculate the blended rural
and imputed floor budget neutrality adjustment factors), to
determine the proposed wage index adjusted by the national rural and
imputed floor budget neutrality adjustment, we used FY 2009
discharge data and proposed FY 2011 wage indices to simulate IPPS
payments. First, we compared the national simulated payments without
the rural and imputed floors applied to national simulated payments
with the rural and imputed floors applied to determine the national
rural and imputed floor budget neutrality adjustment factor of
0.995425. This national adjustment was then applied to the wage
indices to produce a national rural and imputed floor budget neutral
wage index.

E. Proposed Rural Community Hospital Demonstration Program
Adjustment

As discussed in section II.F. of the preamble to this
supplemental proposed rule, section 410A of Public Law 108-173
requires the Secretary to establish a demonstration that will modify
reimbursement for inpatient services for up to 15 small rural
hospitals. Section 410A(c)(2) of Public Law 108-173 requires that
``in conducting the demonstration program under this section, the
Secretary shall ensure that the aggregate payments made by the
Secretary do not exceed the amount which the Secretary would have
paid if the demonstration program under this section was not
implemented.'' In the proposed rule we did not apply an adjustment
to the standardized amount to ensure the effects of the rural
community hospital demonstration are budget neutral. However,
section 450(a) of the MMA as amended by sections 3123 and 10313 of
Public Law 111-148 extends the demonstration for an additional 5
years, and allows not more than 30 hospitals to participate in the
20 least densely populated States.
In order to achieve budget neutrality, we are proposing to
adjust the national IPPS rates by an amount sufficient to account
for the added costs of this demonstration. In other words, we are
proposing to apply budget neutrality across the payment system as a
whole rather than merely across the participants of this
demonstration, consistent with past practice. We believe that the
language of the statutory budget neutrality requirement permits the
agency to implement the budget neutrality provision in this manner.
The statutory language requires that ``aggregate payments made by
the Secretary do not exceed the amount which the Secretary would
have paid if the demonstration * * * was not implemented,'' but does
not identify the range across which aggregate payments must be held
equal. As mentioned section II.F. of the preamble to this
supplemental proposed rule, the proposed estimated amount for the
adjustment to the national IPPS rates for FY 2011 is $69,279,673.
Accordingly to account for the changes in the Affordable Care Act,
we computed a proposed factor of 0.999313 for the rural community
hospital demonstration program adjustment. We note that because the
settlement process for the demonstration hospitals' third year cost
reports, that is, cost reporting periods starting in FY 2007, has
experienced a delay, for this FY 2011 IPPS proposed rule, we are
unable to state the costs of the demonstration corresponding to FY
2007 and as a result are unable to propose the specific numeric
adjustment representing this offsetting process that would be
applied to the national IPPS rates (as discussed above). However, we
expect the cost reports beginning in FY 2007 for hospitals that
participated during FY 2007 to be settled before the FY 2011 IPPS/
LTCH final rule is published. Therefore, for the FY 2011 IPPS/LTCH
PPS final rule, we expect to be able to calculate the amount by
which the costs corresponding to FY 2007 exceeded the amount offset
by the budget neutrality adjustment for FY 2007.

F. Proposed FY 2011 Outlier Fixed-Loss Cost Threshold

In order to compute the FY 2011 proposed outlier threshold, we
used the same methodology in this supplemental proposed rule that we
used in the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24068 through
24069; and incorporated the provisions of Pub. L. 111-148 and Pub.
L. 111-152 as discussed above). However, as discussed in section
II.A. of the preamble to this supplemental proposed rule, in
accordance with section 10324(a) of Public Law 111-148, beginning in
FY 2011, we are proposing to create a wage index floor of 1.00 for
all hospitals located in States determined to be Frontier States. We
noted that the Frontier State floor adjustments will be calculated
and applied after rural and imputed floor budget neutrality
adjustments are calculated for all labor market areas, so as to
ensure that no hospital in a Frontier State will receive a wage
index lesser than 1.00 due to the rural and imputed floor
adjustment. In accordance with section 10324(a) of Public Law 111-
148, the Frontier State adjustment will not be subject to budget
neutrality, and will only be extended to hospitals geographically
located within a Frontier State. However, for purposes of estimating
the proposed outlier threshold for FY 2011, it is necessary to apply
this provision by adjusting the wage index of those eligible
hospitals in a Frontier State when calculating the outlier threshold
that results in outlier payments being 5.1 percent of total payments
for FY 2011. If we did not take into account this provision, our
estimate of total FY 2011 payments would be too low, and as a
result, our proposed outlier threshold would be too high, such that
estimated outlier payments would be less than our projected 5.1
percent of total payments.
We are proposing an outlier fixed-loss cost threshold for FY
2011 equal to the prospective payment rate for the DRG, plus any IME
and DSH payments, and any add-on payments for new technology, plus
$24,165.

G. FY 2011 Proposed Outlier Adjustment Factors

Using the same methodology in this supplemental proposed rule
that we used in the FY 2011 IPPS/LTCH PPS proposed rule (75 FR
24069; and incorporating the provisions of the Affordable Care Act
as discussed above), we computed the following proposed FY 2011
outlier adjustment factors that are applied to the proposed FY 2011
standardized amount for the proposed FY 2011 outlier threshold:

----------------------------------------------------------------------------------------------------------------
Operating standardized
amounts Capital federal rate
----------------------------------------------------------------------------------------------------------------
National.................................................. 0.948995 0.943217
Puerto Rico............................................... 0.951459 0.925238
----------------------------------------------------------------------------------------------------------------

[[Page 30976]]

H. Proposed FY 2011 Standardized Amount

We calculated the proposed FY 2011 standardized amounts using
the methodology proposed in the FY 2011 IPPS proposed rule taking
into account the changes required by the provisions of Public Law
111-148. Tables 1A and 1B in this supplemental proposed rule contain
the proposed national standardized amount that we are applying to
all hospitals, except hospitals in Puerto Rico. The proposed Puerto
Rico-specific amounts are shown in Table 1C. The proposed amounts
shown in Tables 1A and 1B differ only in that the labor-related
share applied to the proposed standardized amounts in Table 1A is
68.8 percent, and the labor-related share applied to the proposed
standardized amounts in Table 1B is 62 percent.
In addition, Tables 1A and 1B include the proposed standardized
amounts reflecting the adjusted marker basket update of 2.15 percent
update for FY 2011, and proposed standardized amounts reflecting the
2.0 percentage point reduction to the update (a 0.15 percent update)
applicable for hospitals that fail to submit quality data consistent
with section 1886(b)(3)(B)(viii) of the Act. Below is a revised
table reflecting the changes required by the provisions of the
Affordable Care Act that details the calculation of the proposed FY
2011 standardized amounts. We note that our proposed adjustment for
documentation and coding discussed at (75 FR 24065 through 24067)
has not changed since publication of the FY 2011 IPPS/LTCH proposed
rule. Similar to the FY 2011 IPPS/LTCH PPS proposed rule, the
adjustment of 0.957 is reflected within the table below.
BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TP02JN10.029

The proposed labor-related and nonlabor-related portions of the
national average standardized amounts for Puerto Rico hospitals for
FY 2011 are set forth in Table 1C in this supplemental proposed
rule. (The labor-related share applied to the Puerto Rico-specific
standardized amount is either 62.1 percent or 62 percent, depending
on which is more advantageous to the hospital.)

[[Page 30977]]

I. Proposed Adjustments for Area Wage Levels

The following wage index tables were revised in this
supplemental proposed rule as a result of the provisions of Public
Law 111-148: Tables 2, 4A, 4B, 4C, 4D-2, 4J, and 9A. (These tables
are also available on the CMS Web site.)

II. Supplemental Proposed FY 2011 Prospective Payment Systems Payment
Rates for Capital Related Costs

Although the provisions of Public Law 111-148, do not directly
affect the payment rates and policies for the IPPS for capital-
related costs, as discussed in section II.G. of the preamble of this
supplemental proposed rule, we are proposing the capital IPPS
standard Federal rates for FY 2011. This is necessary because the
wage index changes required by the provisions of Public Law 111-148
(discussed above in section II.A. of preamble to this supplemental
proposed rule) affect the proposed budget neutrality adjustment
factor for changes in DRG classifications and weights and the
geographic adjustment factor (GAF) since the GAF values are derived
from the wage index values (see Sec. 412.316(a)). In addition, the
provisions of Public Law 111-148, also necessitate a revision to the
proposed outlier payment adjustment factor since a single set of
thresholds is used to identify outlier cases for both inpatient
operating and inpatient capital-related payments (see Sec.
412.312(c)).
In this supplemental proposed rule, we have calculated the
proposed FY 2011 capital Federal rates, offsets, and budget
neutrality factors using the same methodology we proposed in the May
4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (CMS-1498-P) that was
used to calculate the proposed rates included in that rule which did
not reflect the provision of Public Law 111-148. For a complete
description of this methodology, please see the May 4, 2010 FY 2011
IPPS/LTCH PPS proposed rule (75 FR 24073 through 24082).

A. Proposed Capital Standard Federal Rate Update for FY 2011

The proposed factors used in the update framework are not
affected by the provisions of the Affordable Care Act. Therefore,
the proposed update factor for FY 2011 is not being revised from the
proposed capital IPPS standard Federal rate update factor discussed
in section III.A.1. of the Addendum to the May 4, 2010 FY 2011 IPPS
proposed rule and remains at 1.5 percent for FY 2011.
A full discussion of the proposed update framework is provided
in that proposed rule (75 FR 24074 through 24076).

B. Proposed Outlier Payment Adjustment Factor

Based on the thresholds as set forth in section III.A.6. of this
Addendum, we estimate that outlier payments for capital-related
costs would equal 5.68 percent for inpatient capital-related
payments based on the proposed capital Federal rate in FY 2011.
Therefore, we are proposing to apply an outlier adjustment factor of
0.9432 in determining the capital Federal rate. For FY 2010, after
taking into account the provisions of the Affordable Care Act, we
estimated that outlier payments for capital would equal 5.22 percent
of inpatient capital-related payments (which required an outlier
adjustment factor of 0.9478) based on the capital Federal rate in FY
2010 (as discussed elsewhere in this Federal Register). Thus, we
estimate that the percentage of capital outlier payments to total
capital standard payments for FY 2011 would be higher than the
percentage for FY 2010. This increase in capital outlier payments is
primarily due to the estimated decrease in capital IPPS payments per
discharge. That is, because capital payments per discharge are
projected to be slightly lower in FY 2011 compared to FY 2010, as
shown in Table III. in section VIII. of the Appendix to this
supplemental proposed rule, more cases would qualify for outlier
payments.
The outlier reduction factors are not built permanently into the
capital rates; that is, they are not applied cumulatively in
determining the capital Federal rate. The proposed FY 2011 outlier
adjustment of 0.9432 is a -0.49 percent change from the FY 2010
outlier adjustment of 0.9478. Therefore, the net change in the
outlier adjustment to the proposed capital Federal rate for FY 2011
is 0.9951 (0.9432/0.9478). Thus, the proposed outlier adjustment
decreases the proposed FY 2011 capital Federal rate by 0.49 percent
compared with the FY 2010 outlier adjustment.
A single set of thresholds is used to identify outlier cases for
both inpatient operating and inpatient capital-related payments (see
Sec. 412.312(c)). The outlier thresholds are set so that operating
outlier payments are projected to be 5.1 percent of total operating
IPPS DRG payments. The proposed outlier thresholds for FY 2011 are
in section III.A.6. of this Addendum. For FY 2011, a case would
qualify as a cost outlier if the cost for the case plus the IME and
DSH payments is greater than the prospective payment rate for the
MS-DRG plus the fixed-loss amount of $24,165.

C. Proposed Budget Neutrality Adjustment Factor for Changes in DRG
Classifications and Weights and the GAF

Using the methodology discussed in section III.A.3. of the
Addendum to the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75
FR 24077 through 24079), for FY 2011, we are proposing a GAF/DRG
budget neutrality factor of 1.0015, which is the product of the
proposed incremental GAF budget neutrality factor of 1.0023 and the
proposed DRG budget neutrality factor of 0.9992 (the proposed DRG
budget neutrality factor remains unchanged from the May 4, 2010 FY
2011 IPPS proposed rule). The GAF/DRG budget neutrality factors are
built permanently into the capital rates; that is, they are applied
cumulatively in determining the capital Federal rate. This follows
the requirement that estimated aggregate payments each year be no
more or less than they would have been in the absence of the annual
DRG reclassification and recalibration and changes in the GAFs. The
incremental change in the proposed adjustment from FY 2010 to FY
2011 is 1.0015. The cumulative change in the proposed capital
Federal rate due to this adjustment is 0.9926 (the product of the
incremental factors for FYs 1995 though 2010 and the proposed
incremental factor of 1.0015 for FY 2011). (We note that averages of
the incremental factors that were in effect during FYs 2005 and
2006, respectively, and the revised FY 2010 factor of 0.9994 that
reflect the effect of the provisions of the Affordable Care Act (as
discussed elsewhere in this Federal Register) were used in the
calculation of the cumulative adjustment of 0.9926 for FY 2011.) The
proposed cumulative adjustments for MS-DRG classifications and
proposed changes in relative weights and for proposed changes in the
national GAFs through FY 2011 is 0.9926. The following table
summarizes the adjustment factors for each fiscal year:
BILLING CODE 4120-01-P

[[Page 30978]]

[GRAPHIC] [TIFF OMITTED] TP02JN10.030

BILLING CODE 4120-01-C
The proposed factor accounts for the proposed MS-DRG
reclassifications and recalibration and for proposed changes in the
GAFs, which include the changes to the wage

[[Page 30979]]

index as required by the provisions of Public Law 111-148, as
amended (as discussed in section II.A. of the preamble of this
supplemental proposed rule). It also incorporates the effects on the
proposed GAFs of FY 2011 geographic reclassification decisions made
by the MGCRB compared to FY 2010 decisions. However, it does not
account for changes in payments due to changes in the DSH and IME
adjustment factors.

D. Exceptions Payment Adjustment Factor

The provisions of Public Law 111-148, as amended, have no effect
on capital exceptions payments. Therefore, the special exceptions
adjustment factor remains at 0.9997 as discussed in section III.A.4.
of the May 4, 2010 FY 2011 IPPS proposed rule (75 FR 24079).

E. Prospective MS-DRG Documentation and Coding Adjustment to the
Capital Federal Rates for FY 2011 and Subsequent Years

The provisions of Public Law 111-148, as amended, have no effect
on the proposed prospective documentation and coding adjustment to
the capital Federal rates. Therefore, as discussed in greater detail
in section V.E. of the preamble of the May 4, 2010 FY 2011 IPPS
proposed rule (75 FR 24013 through 24015), proposed an additional
2.9 percent reduction to the national capital Federal payment rate
in FY 2011, resulting in a cumulative documentation and coding
adjustment factor of 0.957 for the proposed FY 2011 national capital
Federal rate percent (that is, the existing -0.6 percent adjustment
in FY 2008 plus the -0.9 percent adjustment in FY 2009 plus the
proposed additional -2.9 percent adjustment, computed as 1 divided
by (1.006 x 1.009 x 1.029).

F. Proposed Capital Standard Federal Rate for FY 2011

As a result of the proposed 1.5 percent update and other
proposed budget neutrality factors discussed above, we are proposing
to establish a national capital Federal rate of $422.18 for FY 2011.
We are providing the following chart that shows how each of the
proposed factors and adjustments for FY 2011 affects the computation
of the proposed FY 2011 national capital Federal rate in comparison
to the FY 2010 national capital Federal rate (revised to reflect the
effect of the provisions of the Affordable Care Act (as discussed
elsewhere in this Federal Register). The proposed FY 2011 update
factor has the effect of increasing the proposed capital Federal
rate by 1.5 percent compared to the FY 2010 capital Federal rate.
The proposed GAF/DRG budget neutrality factor of 1.0015 has the
effect of increasing the proposed capital Federal rate by 0.15
percent compared to the FY 2010 capital Federal rate. The proposed
FY 2011 outlier adjustment factor has the effect of decreasing the
proposed capital Federal rate by 0.49 percent compared to the FY
2010 capital Federal rate. The proposed FY 2011 exceptions payment
adjustment factor has the effect of decreasing the proposed capital
Federal rate by 0.01 percent compared to the FY 2010 capital Federal
rate. Furthermore, as shown in the chart below, the resulting
cumulative adjustment for changes in documentation and coding that
do not reflect real changes in patients' severity of illness (that
is, the proposed cumulative adjustment factor of 0.957 has the net
effect of decreasing the proposed FY 2011 national capital Federal
rate by 2.8 percent as compared to the FY 2010 national capital
Federal rate. The combined effect of all the proposed changes would
decrease the proposed national capital Federal rate by approximately
1.72 percent compared to the FY 2010 national capital Federal rate.

Comparison of Factors and Adjustments: FY 2010 Capital Federal Rate and Proposed FY 2011 Capital Federal Rate
----------------------------------------------------------------------------------------------------------------
Proposed Percent
FY 2010 * FY 2011 Change change
----------------------------------------------------------------------------------------------------------------
Update Factor \1\............................................... 1.0120 1.0150 1.0150 1.50
GAF/DRG Adjustment Factor \1\................................... 0.9994 1.0015 1.0015 0.15
Outlier Adjustment Factor \2\................................... 0.9478 0.9432 0.9951 -0.49
Exceptions Adjustment Factor \2\................................ 0.9998 0.9997 0.9999 -0.01
MS-DRG Documentation and Coding Adjustment Factor............... \3\ 0.9850 \4\ 0.9570 \5\ 0.9716 -2.84
Capital Federal Rate............................................ $429.56 $422.18 0.9828 -1.72
----------------------------------------------------------------------------------------------------------------
\1\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates.
Thus, for example, the incremental change from FY 2010 to FY 2011 resulting from the application of the
proposed 1.0015 GAF/DRG budget neutrality factor for FY 2011 is a net change of 1.0015.
\2\ The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital
rates; that is, these factors are not applied cumulatively in determining the capital rates. Thus, for
example, the proposed net change resulting from the application of the proposed FY 2011 outlier adjustment
factor is 0.9432/0.9478, or 0.9951.
\3\ The documentation and coding adjustment factor includes the -0.6 percent in FY 2008, -0.9 percent in FY
2009, and no additional reduction in FY 2010.
\4\ The documentation and coding adjustment factor includes the -0.6 percent in FY 2008, -0.9 percent in FY
2009, no additional reduction in FY 2010 and the proposed -2.9 percent reduction in FY 2011.
\5\ The change is measured from the FY 2009 cumulative factor of 0.9850.
* The revised FY 2010 capital Federal rate, which reflects the effect of the provisions of the Affordable Care
Act (as discussed elsewhere in this Federal Register).

G. Proposed Special Capital Rate for Puerto Rico Hospitals

Using the methodology discussed in the May 4, 2010 FY 2011 IPPS
proposed rule (75 FR 24081), with the changes we are proposing to
make to the factors used to determine the capital rate, the proposed
FY 2011 special capital rate for hospitals in Puerto Rico is
$199.49. (See the May 4, 2010 FY 2011 IPPS proposed rule (75 FR
24015 through 24016 and 24081) for additional information on the
calculation of the proposed FY 2011 capital Puerto Rico specific
rate.)

III. Supplemental Proposed Changes to the Payment Rates for the LTCH
PPS for FY 2011

A. Proposed LTCH PPS Standard Federal Rate for FY 2011

1. Background

In section VII. of the preamble of the May 4, 2011 FY 2011
proposed rule, we discuss our proposed changes to the payment rates,
factors, and specific policies under the LTCH PPS for FY 2011. As
noted previously, on March 23, 2010, the Patient Protection and
Affordable Care Act, Public Law 111-148, was enacted, and the Health
Care and Education Reconciliation Act of 2010, Public Law 111-152,
which amended certain provisions of Public Law 111-148, was enacted
on March 30, 2010. Although a number of the provisions of Public Law
111-148 and Public Law 111-152 affect the LTCH PPS, due to the
timing of the passage of the legislation, we were unable to address
those provisions in the May 4, 2011 FY 2011 IPPS/LTCH PPS proposed
rule. Therefore, the proposed policies and payment rates in that
proposed rule do not reflect the new legislation. Below we address
the provisions of the Affordable Care Act that affect our proposed
policies and payment rates for FY 2011 under the LTCH PPS. In
addition, we have issued further instructions implementing the
provisions of the Affordable Care Act, that affect the policies and
payment rates for RY 2010 under the LTCH PPS. Specifically, we have
established

[[Page 30980]]

revised RY 2010 rates and factors in a separate notice elsewhere is
this Federal Register consistent with the provisions of sections
1886(m)(3) and (4) of the Act and section 3401(p) of Public Law 111-
148.

2. Revision of Certain Market Basket Updates Incorporating the
Provisions of the Affordable Care Act

New section 1886(m)(3)(A)(ii) of the Act by specifies that for
each of the rate years 2010 through 2019, any annual update to the
standard Federal rate, for discharges for the hospital for the rate
year, shall be reduced by the other adjustment specified in new
section 1886(m)(4) of the Act. Additionally, new 1886(m)(3)(A)(i) of
the Act provides that any annual update to the standard Federal
rate, for discharges occurring during the rate year, shall be
reduced for rate year 2012 and each subsequent rate year by the
productivity adjustment described in section 1866(b)(3)(B)(xi)(II)
of the Act. Sections 1886(m)(3)(A)(ii) and (4)(A)-(B) require a 0.25
percentage point reduction for rate year 2010 and a 0.50 percentage
point reduction for rate year 2011. In addition, section
1886(m)(3)(B) of the Act provides that the application of section
1886(m)(3) may result in the annual update being less than zero for
a rate year, and may result in payment rates for a rate year being
less than such payment rates for the preceding rate year.
Furthermore, section 3401(p) of Public Law 111-148 specifies that
the amendments made by section 3401(c) of Public Law 111-148 shall
not apply to discharges occurring before April 1, 2010.
We note that in the May 4, 2010 FY 2011 proposed rule, since the
annual update to the LTCH PPS policies, rates and factors now occurs
on October 1st, we proposed to adopt the term ``fiscal year'' (FY)
rather than ``rate year'' (RY) under the LTCH PPS beginning October
1, 2010 to conform with the standard definition of the Federal
fiscal year (October 1 through September 30) used by other PPSs,
such as the IPPS (see 75 FR 24146 through 24147). Consequently, in
that proposed rule and this supplemental proposed rule, for purposes
of clarity, when discussing the annual update for the LTCH PPS, we
employed ``FY'' rather than ``RY'' because it is our intent that the
phrase ``FY'' be used prospectively in all circumstances dealing
with the LTCH PPS. Similarly, although the language of sections
3401(c) and 10319 of Public Law 111-148, and section 1105(b) of
Public Law 111-152 refers to years 2010 and thereafter under the
LTCH PPS as ``rate year,'' consistent with our proposal to change
the terminology used under the LTCH PPS from ``rate year'' to
``fiscal year,'' for purposes of clarity, in this supplemental
proposed rule, when discussing the annual update for the LTCH PPS,
including the provisions of the Affordable Care Act, we will
continue to employed ``FY'' rather than ``RY'' for 2011 and
subsequent years because it is our intent that ``FY'' be used
prospectively in all circumstances dealing with the LTCH PPS.
The proposed FY 2011 LTCH PPS standard Federal rate, discussed
below in section III.A.3. of this supplemental proposed rule, would
be calculated by applying the required 0.50 percentage point
reduction to the proposed FY 2011 market basket update consistent
with sections 1886(m)(3)(A)(ii) and (4)(B) of the Act (that is, 1.9
percent) in addition to the proposed adjustment to account for any
changes in documentation and coding practices that do not reflect
increased patient severity of illness discussed in section VII.C.3.
of the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed
rule (that is, 2.5 percent).

3. Development of the Proposed FY 2011 LTCH PPS Standard Federal Rate

As discussed in the May 4, 2010 FY 2011 proposed rule, while we
continue to believe that an update to the LTCH PPS standard Federal
rate should be based on the most recent estimate of the increase in
the LTCH PPS market basket, we also believe it is appropriate that
the standard Federal rate be offset by an adjustment to account for
any changes in documentation and coding practices that do not
reflect increased patient severity of illness. Such an adjustment
protects the integrity of the Medicare Trust Funds by ensuring that
the LTCH PPS payment rates better reflect the true costs of treating
LTCH patients.
For FY 2011, as discussed in section II.J.4. of the preamble of
this proposed rule, the proposed market basket update under the LTCH
PPS for FY 2011 is 1.9 percent (that is, the most recent estimate of
the LTCH PPS market basket of 2.4 percent minus the 0.50 percentage
points required by sections 1886(m)(3)(A)(ii) and (4)(B) of the Act.
Furthermore, as discussed in greater detail in section VII.C.3. of
the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule,
we performed a CMI analysis using the most recent available LTCH
claims data (FY 2009) under both the current MS-LTC-DRG and the
former CMS LTC-DRG patient classification systems. Based on this
evaluation, we determined that there was a cumulative increase in
LTCH CMI of 2.5 percent due to changes in documentation and coding
that did not reflect real changes in patient severity of illness for
LTCH discharges occurring in FY 2008 and FY 2009.
In this supplemental proposed rule, consistent with our
historical practice, we are proposing to update the LTCH PPS
standard Federal rate for FY 2011 based on the full proposed LTCH
PPS market basket increase estimate of 2.4 percent, adjusted by the
0.50 percentage point reduction required by sections
1886(m)(3)(A)(ii) and (4)(B) of the Act, and an adjustment to
account for the increase in case-mix in a prior periods (FYs 2008
and 2009) that resulted from changes in documentation and coding
practices of -2.5 percent. Consequently, the proposed update factor
to the standard Federal rate for FY 2011 is -0.59 percent (that is,
we are proposing to apply a factor of 0.9941 in determining the LTCH
PPS standard Federal rate for FY 2011, calculated as 1.019 x 1
divided by 1.025 = 0.9941 or -0.59 percent (0.9941 minus 1 equals
0.59 percent)). Furthermore, consistent with our historical practice
of updating the standard Federal rate for the previous rate year, in
determining the proposed standard Federal rate for FY 2011 in this
supplemental proposed rule, we are applying the proposed update
factor of 0.9941 to the revised RY 2010 standard Federal rate that
is being established in accordance with the provisions of sections
1886(m)(3)(A)(ii) and (4)(A) of the Act, as implemented in a
separate notice published elsewhere in this Federal Register.
Therefore, in this supplemental proposed rule, under the
authority of sections 1886(m)(3)(A)(ii) and (4)(B) of the Act, we
are proposing to amend Sec. 412.523 to add a new paragraph
(c)(3)(vii) to specify that the standard Federal rate for discharges
occurring on or after October 1, 2010, through September 30, 2011,
is the standard Federal rate for the previous rate year updated by -
0.59 percent. In determining the proposed standard Federal rate for
FY 2011, we are applying the proposed 0.9941 update factor to the RY
2010 Federal rate of $39,794.95 (as established elsewhere in this
Federal Register). Consequently, the proposed standard Federal rate
for FY 2011 is $39,560.16. We also are proposing that if more recent
data become available, we would use those data, if appropriate, to
determine the update to the standard Federal rate for FY 2011 in the
final rule, and, thus, the standard Federal rate update specified in
the proposed regulation text at Sec. 412.523(c)(3)(vii) could
change accordingly.

B. Proposed Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases

1. Background

When we implemented the LTCH PPS in the FY 2003 LTCH PPS final
rule, in the regulations at Sec. 412.525(a), we established an
adjustment for additional payments for outlier cases that have
extraordinarily high costs relative to the costs of most discharges
(see (67 FR 56022 through 56027)). We refer to these cases as high
cost outliers (HCOs). Providing additional payments for outliers
strongly improves the accuracy of the LTCH PPS in determining
resource costs at the patient and hospital level. These additional
payments reduce the financial losses that would otherwise be
incurred when treating patients who require more costly care and,
therefore, reduce the incentives to underserve these patients. We
set the outlier threshold before the beginning of the applicable
rate year so that total estimated outlier payments are projected to
equal 8 percent of total estimated payments under the LTCH PPS.
Under Sec. 412.525(a) in the regulations (in conjunction with
Sec. 412.503), we make outlier payments for any discharges if the
estimated cost of a case exceeds the adjusted LTCH PPS payment for
the MS-LTC-DRG plus a fixed-loss amount. Specifically, in accordance
with Sec. 412.525(a)(3) (in conjunction with Sec. 412.503), we pay
outlier cases 80 percent of the difference between the estimated
cost of the patient case and the outlier threshold, which is the sum
of the adjusted Federal prospective payment for the MS-LTC-DRG and
the fixed-loss amount. The fixed-loss amount is the amount used to
limit the loss that a hospital will incur under the outlier policy
for a case with unusually high costs. This results in Medicare and
the LTCH sharing financial risk in the treatment of extraordinarily
costly cases. Under the LTCH PPS HCO policy, the LTCH's loss is
limited to the fixed-loss amount and a fixed

[[Page 30981]]

percentage of costs above the outlier threshold (MS-LTC-DRG payment
plus the fixed-loss amount). The fixed percentage of costs is called
the marginal cost factor. We calculate the estimated cost of a case
by multiplying the Medicare allowable covered charge by the
hospital's overall hospital cost-to-charge ratio (CCR).
Under the LTCH PPS, we determine a fixed-loss amount, that is,
the maximum loss that a LTCH can incur under the LTCH PPS for a case
with unusually high costs before the LTCH will receive any
additional payments. We calculate the fixed-loss amount by
estimating aggregate payments with and without an outlier policy.
The fixed-loss amount results in estimated total outlier payments
being projected to be equal to 8 percent of projected total LTCH PPS
payments. Currently, MedPAR claims data and CCRs based on data from
the most recent provider specific file (PSF) (or from the applicable
statewide average CCR if a LTCH's CCR data are faulty or
unavailable) are used to establish a fixed-loss threshold amount
under the LTCH PPS.
As discussed previously in this section, the proposed policies
and payment rates in the May 4, 2011 FY 2011 proposed rule do not
reflect the provisions of the Affordable Care Act that affect LTCH
PPS payments. The revised proposed standard Federal rate for FY 2011
that was developed consistent with the provisions of sections
1886(m)(3)(A)(ii) and (4)(B) of the Act is discussed above in
section III.A.3. of the Addendum of this supplemental proposed rule.
This revision to the proposed standard Federal rate for FY 2011
requires us to revise the proposed high cost outlier fixed-loss
amount for FY 2011. This is necessary in order to maintain the
requirement that the fixed-loss amount results in estimated total
outlier payments being projected to be equal to 8 percent of
projected total LTCH PPS payments.

2. The Proposed LTCH PPS Fixed-Loss Amount for FY 2011

When we implemented the LTCH PPS, as discussed in the August 30,
2002 LTCH PPS final rule (67 FR 56022 through 56026), we established
a fixed-loss amount so that total estimated outlier payments are
projected to equal 8 percent of total estimated payments under the
LTCH PPS. To determine the fixed-loss amount, we estimate outlier
payments and total LTCH PPS payments for each case using claims data
from the MedPAR files. Specifically, to determine the outlier
payment for each case, we estimate the cost of the case by
multiplying the Medicare covered charges from the claim by the
applicable CCR. Under Sec. 412.525(a)(3) (in conjunction with Sec.
412.503), if the estimated cost of the case exceeds the outlier
threshold (the sum of the adjusted Federal prospective payment for
the MS-LTC-DRG and the fixed-loss amount), we pay an outlier payment
equal to 80 percent of the difference between the estimated cost of
the case and the outlier threshold (the sum of the adjusted Federal
prospective payment for the MS-LTC-DRG and the fixed-loss amount).
As discussed in the May 4, 2010 FY 2011 proposed rule, we are
proposing to continue to use our existing methodology to calculate
the proposed fixed-loss amount for FY 2011 in order to maintain
estimated HCO payments at the projected 8 percent of total estimated
LTCH PPS payments. (For an explanation of our rationale for
establishing an HCO payment ``target'' of 8 percent of total
estimated LTCH payments, we refer readers to the August 30, 2002
LTCH PPS final rule (67 FR 56022 through 56024).) Consistent with
our historical practice of using the best data available, in
determining the proposed fixed-loss amount for FY 2011, we use the
most recent available LTCH claims data and CCR data. Specifically,
for this proposed rule, we used LTCH claims data from the December
2009 update of the FY 2009 MedPAR files and CCRs from the December
2009 update of the PSF to determine a fixed-loss amount that would
result in estimated outlier payments projected to be equal to 8
percent of total estimated payments in FY 2011 because these data
are the most recent complete LTCH data currently available. (We note
that these are the same data used to determine the proposed FY 2011
fixed-loss amount in the May 4, 2010 FY 2011 proposed rule.)
Consistent with the historical practice of using the best available
data, we are proposing that if more recent LTCH claims data become
available, we will use them for determining the fixed-loss amount
for FY 2011 in the final rule. Furthermore, we are proposing to
determine the proposed FY 2011 fixed-loss amount based on the MS-
LTC-DRG classifications and relative weights from the version of the
GROUPER that will be in effect as of the beginning of FY 2011, that
is, proposed Version 28.0 of the GROUPER (discussed in section
VII.D. of the preamble of this supplemental proposed rule).
In this proposed rule, we are proposing to establish a fixed-
loss amount of $19,254 for FY 2011. Thus, we would pay an outlier
case 80 percent of the difference between the estimated cost of the
case and the outlier threshold (the sum of the adjusted Federal LTCH
payment for the MS-LTC-DRG and the fixed-loss amount of $19,254).
The proposed fixed-loss amount for FY 2011 of $19,254 is
slightly higher than the revised RY 2010 fixed-loss amount of
$18,615 (established elsewhere in this Federal Register). Based on
our payment simulations using the most recent available data and the
proposed 0.59 percent reduction to the standard Federal rate for FY
2011, the proposed increase in the fixed-loss amount for FY 2011
would be necessary to maintain the existing requirement that
estimated outlier payments would equal 8 percent of estimated total
LTCH PPS payments. (For further information on and our rationale for
the existing 8 percent HCO ``target'' requirement, we refer readers
to the August 30, 2002 LTCH PPS final rule (67 FR 56022 through
56024.) Maintaining the fixed-loss amount at the current level would
result in HCO payments that are greater than the current 8 percent
regulatory requirement because a higher fixed-loss amount would
result in fewer cases qualifying as outlier cases as well as
decreases the amount of the additional payment for a HCO case
because the maximum loss that a LTCH must incur before receiving an
HCO payment (that is, the fixed-loss amount) would be larger. For
these reasons, we believe that proposing to raise the fixed-loss
amount is appropriate and necessary to maintain that estimated
outlier payments would equal 8 percent of estimated total LTCH PPS
payments as required under Sec. 412.525(a).
As we noted in the May 4, 2010 FY 2011 proposed rule (75 FR
24089), under some rare circumstances, a LTCH discharge could
qualify as a SSO case (as defined in the regulations at Sec.
412.529 in conjunction with Sec. 412.503) and also as a HCO case.
In this scenario, a patient could be hospitalized for less than
five-sixths of the geometric average length of stay for the specific
MS-LTC-DRG, and yet incur extraordinarily high treatment costs. If
the costs exceeded the HCO threshold (that is, the SSO payment plus
the fixed-loss amount), the discharge is eligible for payment as a
HCO. Thus, for a SSO case in FY 2011, the HCO payment would be 80
percent of the difference between the estimated cost of the case and
the outlier threshold (the sum of the proposed fixed-loss amount of
$19,254 and the amount paid under the SSO policy as specified in
Sec. 412.529).

C. Computing the Proposed Adjusted LTCH PPS Federal Prospective
Payments for FY 2011

In accordance with Sec. 412.525, the proposed standard Federal
rate is adjusted to account for differences in area wages by
multiplying the proposed labor-related share of the proposed
standard Federal rate by the appropriate proposed LTCH PPS wage
index (as shown in Tables 12A and 12B of the Addendum of this
proposed rule). The proposed standard Federal rate is also adjusted
to account for the higher costs of hospitals in Alaska and Hawaii by
multiplying the proposed nonlabor-related share of the proposed
standard Federal rate by the appropriate cost-of-living factor
(shown in the chart in section V.C.5. of the Addendum of the May 4,
2010 FY 2011 IPPS/LTCH PPS proposed rule). In this proposed rule, we
are proposing to establish a standard Federal rate for FY 2011 of
$39,560.16, as discussed in section V.A.3. of the Addendum of this
supplemental proposed rule. We illustrate the methodology to adjust
the proposed LTCH PPS Federal rate for FY 2011 in the following
example:
Example: During FY 2011, a Medicare patient is in a LTCH located
in Chicago, Illinois (CBSA 16974). The proposed FY 2011 LTCH PPS
wage index value for CBSA 16974 is 1.0573 (Table 12A of the Addendum
of this proposed rule). The Medicare patient is classified into MS-
LTC-DRG 28 (Spinal Procedures with MCC), which has a proposed
relative weight for FY 2011 of 1.0834 (Table 11 of the Addendum of
this supplemental proposed rule).
To calculate the LTCH's total adjusted Federal prospective
payment for this Medicare patient, we compute the wage-adjusted
proposed Federal prospective payment amount by multiplying the
unadjusted proposed standard Federal rate ($39,560.16) by the
proposed labor-related share (75.407 percent) and the proposed wage
index value (1.0573). This wage-adjusted amount is then added to the

[[Page 30982]]

proposed nonlabor-related portion of the unadjusted proposed
standard Federal rate (24.593 percent; adjusted for cost of living,
if applicable) to determine the adjusted proposed Federal rate,
which is then multiplied by the proposed MS-LTC-DRG relative weight
(1.0834) to calculate the total adjusted proposed Federal LTCH PPS
prospective payment for FY 2011 ($45,046.57). The table below
illustrates the components of the calculations in this example.

------------------------------------------------------------------------

------------------------------------------------------------------------
Unadjusted Proposed Standard Federal $39,560.16
Prospective Payment Rate......................
Proposed Labor-Related Share................... x 0.75407
Labor-Related Portion of the Proposed Federal = $29,831.13
Rate..........................................
Proposed Wage Index (CBSA 16974)............... x 1.0573
Proposed Wage-Adjusted Labor Share of Federal = $31,540.45
Rate..........................................
Proposed Nonlabor-Related Portion of the + $9,729.03
Federal Rate ($39,560.16 x 0.24593)...........
Adjusted Proposed Federal Rate Amount.......... = $41,269.48
Proposed MS-LTC-DRG 28 Relative Weight......... x 1.0834
------------------------
Total Adjusted Federal Prospective Payment. = $44,711.36
------------------------------------------------------------------------

IV. Tables

This section contains the tables referred to throughout the
preamble to this proposed rule and in this Addendum. Tables 1A, 1B,
1C, 1D, 1E, 2, 4A, 4B, 4C, 4D-2, 4J, 9A, 10, and 11 are presented
below. The tables presented below are as follows:

Table 1A.--Supplemental Proposed National Adjusted Operating
Standardized Amounts, Labor/Nonlabor (68.8 Percent Labor Share/31.2
Percent Nonlabor Share If Wage Index Is Greater Than 1).
Table 1B.--Supplemental Proposed National Adjusted Operating
Standardized Amounts, Labor/Nonlabor (62 Percent Labor Share/38
Percent Nonlabor Share If Wage Index Is Less Than or Equal To 1).
Table 1C.--Supplemental Proposed Adjusted Operating Standardized
Amounts for Puerto Rico, Labor/Nonlabor.
Table 1D.--Supplemental Proposed Capital Standard Federal Payment
Rate.
Table 1E.--Supplemental Proposed LTCH Standard Federal Prospective
Payment Rate.
Table 2.--Acute Care Hospitals Case-Mix Indexes for Discharges
Occurring in Federal Fiscal Year 2009; Proposed Hospital Wage
Indexes for Federal Fiscal Year 2011; Hospital Average Hourly Wages
for Federal Fiscal Years 2009 (2005 Wage Data), 2010 (2006 Wage
Data), and 2011 (2007 Wage Data); and 3-Year Average of Hospital
Average Hourly Wages.
Table 4A.--Proposed Wage Index and Capital Geographic Adjustment
Factor (GAF) for Acute Care Hospitals in Urban Areas by CBSA and by
State--FY 2011.
Table 4B.--Proposed Wage Index and Capital Geographic Adjustment
Factor (GAF) for Acute Care Hospitals in Rural Areas by CBSA and by
State--FY 2011.
Table 4C.--Proposed Wage Index and Capital Geographic Adjustment
Factor (GAF) for Acute Care Hospitals That Are Reclassified by CBSA
and by State--FY 2011.
Table 4D-2.--Urban Areas with Acute Care Hospitals Receiving the
Statewide Rural Floor or Imputed Floor Wage Index--FY 2011.
Table 4J.--Proposed Out-Migration Adjustment for Acute Care
Hospitals--FY 2011.
Table 9A.--Hospital Reclassifications and Redesignations--FY 2011.
Table 10.--Geometric Mean Plus the Lesser of .75 of the National
Adjusted Operating Standardized Payment Amount (Increased to Reflect
the Difference Between Costs and Charges) or .75 of One Standard
Deviation of Mean Charges by Medicare Severity Diagnosis-Related
Group (MS-DRG)--April 2010.
Table 11.--Supplemental Proposed MS-LTC-DRGs, Relative Weights,
Geometric Average Length of Stay, and Short-Stay Outlier (SSO)
Threshold for Discharges Occurring from October 1, 2010 through
September 30, 2011 under the LTCH PPS.
BILLING CODE 4120-01-P

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Appendix: Regulatory Impact Analysis

I. Overall Impact

We have examined the impacts of this proposed rule as required
by Executive Order 12866 (September 1993, Regulatory Planning and
Review) and the Regulatory Flexibility Act (RFA) (September 19,
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act,
the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive
Order 13132 on Federalism, and the Congressional Review Act (5
U.S.C. 804(2)).
Executive Order 12866 directs agencies to assess all costs and
benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net
benefits (including potential economic, environmental, public health
and safety effects, distributive impacts, and equity). A regulatory
impact analysis (RIA) must be prepared for major rules with
economically significant effects ($100 million or more in any 1
year).
We have determined that this proposed rule is a major rule as
defined in 5 U.S.C. 804(2). We estimate that the proposed changes
for FY 2011 acute care hospital operating and capital payments will
redistribute in excess of $100 million among different types of
inpatient cases. The proposed applicable percentage increase to the
IPPS rates required by the statute, in conjunction with other
proposed payment changes in this proposed rule, would result in an
estimated $929 million decrease in FY 2011 operating payments (or -
0.9 percent increase), and an estimated $20 million decrease in FY
2011 capital payments (or -0.2 percent change). The impact analysis
of the capital payments can be found in section VIII. of this
Appendix. In addition, as described in section IX. of this Appendix,
LTCHs are expected to experience an increase in payments by $12.9
million (or 0.3 percent).
Our operating impact estimate includes the proposed -2.9 percent
documentation and coding adjustment applied to the hospital-specific
rates, the proposed -2.4 percent documentation and coding adjustment
applied to the Puerto Rico-specific rates and the proposed -2.9
percent adjustment for documentation and coding changes to the IPPS
standardized amounts, which was discussed in the May 4, 2010 FY 2011
IPPS/LTCH PPS proposed rule (75 FR 24288). In addition, our
operating impact estimate includes the proposed 2.15 percent market
basket update to the standardized amount (which includes the
proposed 2.4 percent update with the 0.25 reduction required under
the Affordable Care Act). The estimates of IPPS operating payments
to acute care hospitals do not reflect any changes in hospital
admissions or real case-mix intensity, which would also affect
overall payment changes.
The RFA requires agencies to analyze options for regulatory
relief of small businesses. For purposes of the RFA, small entities
include small businesses, nonprofit organizations, and small
government jurisdictions. Most hospitals and most other providers
and suppliers are considered to be small entities, either by being
nonprofit organizations or by meeting the Small Business
Administration definition of a small business (having revenues of
$34.5 million or less in any 1 year). (For details on the latest
standards for health care providers, we refer readers to the Table
of Small Business Size Standards for NAIC 622 found on the Small
Business Administration Office of Size Standards Web site at: http://www.sba.gov/contractingopportunities/officials/size/GC-SMALL-BUS-SIZE-STANDARDS.html.) For purposes of the RFA, all hospitals and
other providers and suppliers are considered to be small entities.
Individuals and States are not included in the definition of a small
entity. We believe that the provisions of this proposed rule
relating to acute care hospitals would have a significant impact on
small entities as explained in this Appendix. Because we lack data
on individual hospital receipts, we cannot determine the number of
small proprietary LTCHs. Therefore, we are assuming that all LTCHs
are considered small entities for the purpose of the analysis in
section IX. of this Appendix. Medicare fiscal intermediaries and
MACs are not considered to be small entities. Because we acknowledge
that many of the affected entities are small entities, the analysis
discussed throughout the preamble of this proposed rule constitutes
our proposed regulatory flexibility analysis. Therefore, we are
soliciting public comments on our estimates and analysis of the
impact of this proposed rule on those small entities.
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA), Public Law 104-121, as amended by section 8302 of Public
Law 110-28, requires an agency to provide compliance guides for each
rule or group of related rules for which an agency is required to
prepare a final regulatory flexibility analysis. The compliance
guides associated with this proposed rule are available on the CMS
IPPS Web page at http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. We also note that the Hospital Center Web page at
http://www.cms.hhs.gov/center/hospital.asp was developed to assist
hospitals in understanding and adapting to changes in Medicare
regulations and in billing and payment procedures. This Web page
provides hospitals with substantial downloadable explanatory
materials.
In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis for any proposed or final rule that may
have a significant impact on the operations of a substantial number
of small rural hospitals. This analysis must conform to the
provisions of section 603 of the RFA. With the exception of
hospitals located in certain New England counties, for purposes of
section 1102(b) of the Act, we now define a small rural hospital as
a hospital that is located outside of an urban area and has fewer
than 100 beds. Section 601(g) of the Social Security Amendments of
1983 (Pub. L. 98-21) designated hospitals in certain New England
counties as belonging to the adjacent urban area. Thus, for purposes
of the IPPS and the LTCH PPS, we continue to classify these
hospitals as urban hospitals. (We refer readers to Table 1 and
section VI. of this Appendix for the quantitative effects of the
proposed policy changes under the IPPS for operating costs.)
Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4) also requires that agencies assess anticipated costs and
benefits before issuing any rule whose mandates require spending in
any 1 year of $100 million in 1995 dollars, updated annually for
inflation. That threshold level is currently approximately $133
million. This proposed rule would not mandate any requirements for
State, local, or Tribal governments, nor would it affect private
sector costs.
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on
State and local governments, preempts State law, or otherwise has
Federalism implications. As stated above, this proposed rule would
not have a substantial effect on State and local governments.
The following analysis, in conjunction with the remainder of
this document, demonstrates that this proposed rule is consistent
with the regulatory philosophy and principles identified in
Executive Order 12866, the RFA, and section 1102(b) of the Act. The
proposed rule would affect payments to a substantial number of small
rural hospitals, as well as other classes of hospitals, and the
effects on some hospitals may be significant.

II. Objectives of the IPPS

The primary objective of the IPPS is to create incentives for
hospitals to operate efficiently and minimize unnecessary costs
while at the same time ensuring that payments are sufficient to
adequately compensate hospitals for their legitimate costs. In
addition, we share national goals of preserving the Medicare
Hospital Insurance Trust Fund.
We believe the proposed changes in this proposed rule would
further each of these goals while maintaining the financial
viability of the hospital industry and ensuring access to high
quality health care for Medicare beneficiaries. We expect that these
proposed changes would ensure that the outcomes of the prospective
payment systems are reasonable and equitable while avoiding or
minimizing unintended adverse consequences.

III. Limitations of Our Analysis

The following quantitative analysis presents the projected
effects of our proposed policy changes, as well as statutory changes
effective for FY 2011, on various hospital groups. We estimate the
effects of individual policy changes by estimating payments per case
while holding all other payment policies constant. We use the best
data available, but, generally, we do not attempt to make
adjustments for future changes in such variables as admissions,
lengths of stay, or case-mix.

IV. Hospitals Included in and Excluded From the IPPS

The prospective payment systems for hospital inpatient operating
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encompass most general short-term, acute care hospitals that
participate in the Medicare program. There were 33 Indian Health
Service hospitals in our database, which we excluded from the
analysis due to the special characteristics of the prospective
payment methodology for these hospitals. Among other short-term,
acute care hospitals, only the 46 such hospitals in Maryland remain
excluded from the IPPS pursuant to the waiver under section
1814(b)(3) of the Act.
As of March 2010, there are 3,472 IPPS acute care hospitals to
be included in our analysis. This represents about 64 percent of all
Medicare-participating hospitals. The majority of this impact
analysis focuses on this set of hospitals. There are also
approximately 1,338 CAHs. These small, limited service hospitals are
paid on the basis of reasonable costs rather than under the IPPS.
(We refer readers to section VII. of this Appendix for a further
description of the impact of CAH-related proposed policy changes.)
There are also 1,270 IPPS-excluded hospitals and 2,169 IPPS-excluded
hospital units. These IPPS-excluded hospitals and units include
IPFs, IRFs, LTCHs, RNHCIs, children's hospitals, and cancer
hospitals, which are paid under separate payment systems. Changes in
the prospective payment systems for IPFs and IRFs are made through
separate rulemaking. Payment impacts for these IPPS-excluded
hospitals and units are not included in this proposed rule. The
impact of the proposed update and policy changes to the LTCH PPS for
FY 2011 are discussed in section IX. of this Appendix.

V. Effects on Hospitals and Hospital Units Excluded From the IPPS

As of March 2010, there were 3,439 hospitals and hospital units
excluded from the IPPS. Of these, 78 children's hospitals, 11 cancer
hospitals, and 17 RNHCIs are being paid on a reasonable cost basis
subject to the rate-of-increase ceiling under Sec. 413.40. The
remaining providers, 228 rehabilitation hospitals and 961
rehabilitation units, and 429 LTCHs, are paid the Federal
prospective per discharge rate under the IRF PPS and the LTCH PPS,
respectively, and 507 psychiatric hospitals and 1,208 psychiatric
units are paid the Federal per diem amount under the IPF PPS. As
stated above, IRFs and IPFs are not affected by rate updates
discussed in this proposed rule. The impacts of the changes to LTCHs
are discussed in section IX. of this Appendix.
In the past, certain hospitals and units excluded from the IPPS
have been paid based on their reasonable costs subject to limits as
established by the Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA). Cancer and children's hospitals continue to be paid on a
reasonable cost basis subject to TEFRA limits for FY 2011. For these
hospitals (cancer and children's hospitals), consistent with the
authority provided in section 1886(b)(3)(B)(ii) of the Act, the
update is the percentage increase in the FY 2011 IPPS operating
market basket. In compliance with section 404 of the MMA, in the FY
2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43930), we replaced the
FY 2002-based IPPS operating and capital market baskets with the
revised and rebased FY 2006-based IPPS operating and capital market
baskets. Therefore, consistent with current law, based on IHS Global
Insight, Inc.'s 2010 first quarter forecast, with historical data
through the 2009 fourth quarter, we are estimating that the proposed
FY 2011 update to the IPPS operating market basket would be 2.4
percent (that is, the current estimate of the market basket rate-of-
increase) which was included in the May 4, 2010 FY 2011 IPPS/LTCH
PPS proposed rule. However, the Affordable Care Act requires a 0.25
reduction to the market basket update resulting in a proposed 2.15
percent applicable percentage increase for IPPS hospitals. RNCHIs,
children's hospitals and cancer hospitals are not subject to the
reduction in the applicable percentage increase required under the
Affordable Care Act. In accordance with Sec. 403.752(a) of the
regulations, RNHCIs are paid under Sec. 413.40. Therefore, for
RNHCIs, the proposed update is the same as for children's and cancer
hospitals, which is the percentage increase in the FY 2011 IPPS
operating market basket increase (which was included in the May 4,
2010 FY 2011 IPPS/LTCH PPS proposed rule) without the reductions
required under the Affordable Care Act, estimated to be 2.4 percent.
The impact of the proposed update in the rate-of-increase limit
on those excluded hospitals depends on the cumulative cost increases
experienced by each excluded hospital since its applicable base
period. For excluded hospitals that have maintained their cost
increases at a level below the rate-of-increase limits since their
base period, the major effect is on the level of incentive payments
these excluded hospitals receive. Conversely, for excluded hospitals
with per-case cost increases above the cumulative update in their
rate-of-increase limits, the major effect is the amount of excess
costs that will not be reimbursed.
We note that, under Sec. 413.40(d)(3), an excluded hospital
that continues to be paid under the TEFRA system, whose costs exceed
110 percent of its rate-of-increase limit receives its rate-of-
increase limit plus 50 percent of the difference between its
reasonable costs and 110 percent of the limit, not to exceed 110
percent of its limit. In addition, under the various provisions set
forth in Sec. 413.40, cancer and children's hospitals can obtain
payment adjustments for justifiable increases in operating costs
that exceed the limit.

VI. Quantitative Effects of the Policy Changes Under the IPPS for
Operating Costs

A. Basis and Methodology of Estimates

In this proposed rule, we are announcing proposed policy changes
and payment rate updates for the IPPS for operating costs of acute
care hospitals. Updates to the capital payments to acute care
hospitals are discussed in section VIII. of this Appendix. Based on
the overall percentage change in payments per case estimated using
our payment simulation model, we estimate that total FY 2011
operating payments would decrease by 0.9 percent compared to FY
2010, largely due to the documentation and coding adjustments and
the applicable percentage increase applied to the IPPS rates. This
amount reflects the proposed FY 2011 documentation and coding
adjustments described in the May 4, 2010 FY 2011 IPPS/LTCH PPS
proposed rule: -2.9 percent for the IPPS national standardized
amounts, -2.9 percent for the IPPS hospital-specific rates, and -2.4
percent for the IPPS Puerto Rico-specific standardized amount. The
impacts do not illustrate changes in hospital admissions or real
case-mix intensity, which will also affect overall payment changes.
We have prepared separate impact analyses of the proposed
changes to each system. This section deals with changes to the
operating prospective payment system for acute care hospitals. Our
payment simulation model relies on the most recent available data to
enable us to estimate the impacts on payments per case of certain
proposed changes in this proposed rule. However, there are other
proposed changes for which we do not have data available that would
allow us to estimate the payment impacts using this model. For those
proposed changes, we have attempted to predict the payment impacts
based upon our experience and other more limited data.
The data used in developing the quantitative analyses of changes
in payments per case presented below are taken from the FY 2009
MedPAR file and the most current Provider-Specific File that is used
for payment purposes. Although the analyses of the proposed changes
to the operating PPS do not incorporate cost data, data from the
most recently available hospital cost report were used to categorize
hospitals. Our analysis has several qualifications. First, in this
analysis, we do not make adjustments for future changes in such
variables as admissions, lengths of stay, or underlying growth in
real case-mix. Second, due to the interdependent nature of the IPPS
payment components, it is very difficult to precisely quantify the
impact associated with each change. Third, we use various sources
for the data used to categorize hospitals in the tables. In some
cases, particularly the number of beds, there is a fair degree of
variation in the data from different sources. We have attempted to
construct these variables with the best available source overall.
However, for individual hospitals, some miscategorizations are
possible.
Using cases from the FY 2009 MedPAR file, we simulated payments
under the operating IPPS given various combinations of payment
parameters. Any short-term, acute care hospitals not paid under the
IPPS (Indian Health Service hospitals and hospitals in Maryland)
were excluded from the simulations. The impact of payments under the
capital IPPS, or the impact of payments for costs other than
inpatient operating costs, are not analyzed in this section.
Estimated payment impacts of the capital IPPS for FY 2011 are
discussed in section VIII. of this Appendix.
The changes discussed separately below are the following:
The effects of the proposed annual reclassification of
diagnoses and procedures, full implementation of the MS-DRG system
and 100 percent cost-based MS-DRG relative weights.
The effects of the proposed changes in hospitals' wage
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data from hospitals' cost reporting periods beginning during FY
2007, compared to the FY 2006 wage data.
The effects of the recalibration of the MS-DRG relative
weights as required by section 1886(d)(4)(C) of the Act, including
the proposed wage and recalibration budget neutrality factors.
The effects of geographic reclassifications by the
MGCRB that will be effective in FY 2011.
The effects of the Frontier wage index provision that
requires that hospitals located in States that qualify as frontier
States cannot have a wage index less than 1.0. This is a nonbudget
neutral provision.
The effects of the rural floor and imputed floor with a
national budget neutrality applied to the wage index, as required by
the Affordable Care Act the Affordable Care Act.
The effects of section 505 of Public Law 108-173, which
provides for an increase in a hospital's wage index if the hospital
qualifies by meeting a threshold percentage of residents of the
county where the hospital is located who commute to work at
hospitals in counties with higher wage indexes.
The total estimated change in payments based on the
proposed FY 2011 policies relative to payments based on FY 2010
policies that include the applicable percentage increase of 2.15 (or
2.4 percent market basket with a 0.25 percentage reduction, as
required under the Affordable Care Act). The FY 2010 operating
payments also account for provisions under the Affordable Care Act
that were effective for FY 2010.
To illustrate the impacts of the proposed FY 2011 changes, our
analysis begins with a FY 2010 baseline simulation model using: the
proposed FY 2011 applicable percentage increase of 2.15 percent; the
FY 2010 MS-DRG GROUPER (Version 27.0); the most current CBSA
designations for hospitals based on OMB's MSA definitions; the FY
2010 wage index; and no MGCRB reclassifications. Outlier payments
are set at 5.1 percent of total operating MS-DRG and outlier
payments.
Section 1886(b)(3)(B)(viii) of the Act, as added by section
5001(a) of Public Law 109-171, provides that, for FY 2007 and
subsequent years, the update factor will be reduced by 2.0
percentage points for any hospital that does not submit quality data
in a form and manner and at a time specified by the Secretary. At
the time that this impact was prepared, 104 hospitals did not
receive the full market basket rate-of-increase for FY 2010 because
they failed the quality data submission process or did not choose to
participate. For purposes of the simulations shown below, we modeled
the proposed payment changes for FY 2011 using a reduced update for
these 104 hospitals. However, we do not have enough information at
this time to determine which hospitals will not receive the full
market basket rate-of-increase for FY 2011.
Each policy change, statutory or otherwise, is then added
incrementally to this baseline, finally arriving at an FY 2011 model
incorporating all of the changes. This simulation allows us to
isolate the effects of each proposed change.
Our final comparison illustrates the proposed percent change in
payments per case from FY 2010 to FY 2011. Three factors not
discussed separately have significant impacts here. The first factor
is the update to the standardized amount. In accordance with section
1886(b)(3)(B)(i) of the Act, we are proposing to update the
standardized amounts for FY 2011 using an applicable percentage
increase of 2.15 percent. In addition, we are updating the Puerto
Rico specific amount by an applicable percentage increase of 2.15
percent. This includes our forecasted hospital market basket
increase of 2.4 percent with a 0.25 percentage reduction as required
under the Affordable Care Act. (Hospitals that fail to comply with
the quality data submission requirements to receive the full update
will receive an update reduced by 2.0 percentage points from 2.15
percent to 0.15 percent.) Under section 1886(b)(3)(B)(iv) of the
Act, the updates to the hospital-specific amounts for SCHs and for
MDHs are also equal to the market basket percentage increase, or
2.15 percent.
A second significant factor that affects the changes in
hospitals' payments per case from FY 2010 to FY 2011 is the change
in a hospital's geographic reclassification status from one year to
the next. That is, payments may be reduced for hospitals
reclassified in FY 2010 that are no longer reclassified in FY 2011.
Conversely, payments may increase for hospitals not reclassified in
FY 2010 that are reclassified in FY 2011.
A third significant factor is that we currently estimate that
actual outlier payments during FY 2010 will be 4.9 percent of total
MS-DRG payments. Our FY 2010 outlier estimate accounts for changes
to the FY 2010 IPPS payments required under the Affordable Care Act.
When the FY 2010 final rule was published, we projected FY 2010
outlier payments would be 5.1 percent of total MS-DRG plus outlier
payments; the average standardized amounts were offset
correspondingly. The effects of the lower than expected outlier
payments during FY 2010 (as discussed in the Addendum to this
proposed rule) are reflected in the analyses below comparing our
current estimates of FY 2010 payments per case to estimated FY 2011
payments per case (with outlier payments projected to equal 5.1
percent of total MS-DRG payments).

B. Analysis of Table I

Table I displays the results of our analysis of the proposed
changes for FY 2011. The table categorizes hospitals by various
geographic and special payment consideration groups to illustrate
the varying impacts on different types of hospitals. The top row of
the table shows the overall impact on the 3,472 acute care hospitals
included in the analysis.
The next four rows of Table I contain hospitals categorized
according to their geographic location: all urban, which is further
divided into large urban and other urban; and rural. There are 2,502
hospitals located in urban areas included in our analysis. Among
these, there are 1,365 hospitals located in large urban areas
(populations over 1 million), and 1,137 hospitals in other urban
areas (populations of 1 million or fewer). In addition, there are
970 hospitals in rural areas. The next two groupings are by bed-size
categories, shown separately for urban and rural hospitals. The
final groupings by geographic location are by census divisions, also
shown separately for urban and rural hospitals.
The second part of Table I shows hospital groups based on
hospitals' FY 2011 payment classifications, including any
reclassifications under section 1886(d)(10) of the Act. For example,
the rows labeled urban, large urban, other urban, and rural show
that the numbers of hospitals paid based on these categorizations
after consideration of geographic reclassifications (including
reclassifications under sections 1886(d)(8)(B) and 1886(d)(8)(E) of
the Act that have implications for capital payments) are 2,555;
1,403; 1,152; and 917, respectively.
The next three groupings examine the impacts of the changes on
hospitals grouped by whether or not they have GME residency programs
(teaching hospitals that receive an IME adjustment) or receive DSH
payments, or some combination of these two adjustments. There are
2,434 nonteaching hospitals in our analysis, 798 teaching hospitals
with fewer than 100 residents, and 240 teaching hospitals with 100
or more residents.
In the DSH categories, hospitals are grouped according to their
DSH payment status, and whether they are considered urban or rural
for DSH purposes. The next category groups together hospitals
considered urban or rural, in terms of whether they receive the IME
adjustment, the DSH adjustment, both, or neither.
The next five rows examine the impacts of the changes on rural
hospitals by special payment groups (SCHs, RRCs, and MDHs). There
were 183 RRCs, 340 SCHs, 187 MDHs, and 108 hospitals that are both
SCHs and RRCs, and 13 hospitals that are both an MDH and an RRC.
The next series of groupings are based on the type of ownership
and the hospital's Medicare utilization expressed as a percent of
total patient days. These data were taken from the FY 2008 or FY
2007 Medicare cost reports.
The next two groupings concern the geographic reclassification
status of hospitals. The first grouping displays all urban hospitals
that were reclassified by the MGCRB for FY 2011. The second grouping
shows the MGCRB rural reclassifications. These groupings account for
the change in the MGCRB reclassification policy as required under
the Affordable Care Act.
The final category shows the impact of the proposed policy
changes on the 19 cardiac hospitals in our analysis.
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C. Effects of the Proposed Changes to the MS-DRG Reclassifications
and Relative Cost-Based Weights (Column 1)

In Column 1 of Table I, we present the effects of the proposed
MS-DRG reclassifications, as discussed in section II. of the
preamble to this supplemental proposed rule. Section
1886(d)(4)(C)(i) of the Act requires us annually to make appropriate
classification changes in order to reflect changes in treatment
patterns, technology, and any other factors that may change the
relative use of hospital resources.
As discussed in the preamble of the May 4, 2010 FY 2011 IPPS/
LTCH PPS proposed rule, the proposed FY 2011 MS-DRG relative weights
will be 100 percent cost-based and 100 percent MS-DRGs. For FY 2011,
the MS-DRGs are calculated using the FY 2009 MedPAR data grouped to
the Version 28.0 (FY 2011) MS-DRGs. The methods of calculating the
proposed relative weights and the reclassification changes to the
grouper are described in more detail in the May 4, 2010 FY 2011
IPPS/LTCH PPS proposed rule. The proposed changes to the relative
weights and MS-DRGs shown in Column 2 are prior to any offset for
budget neutrality. Overall, hospitals will experience a 0.3 percent
increase in payments due to the changes in the MS-DRGs and relative
weights prior to budget neutrality. Urban hospitals and rural
hospitals will experience a 0.3 percent increase in payments under
the updates to the relative weights and MS-DRGs.

D. Effects of the Application of Recalibration Budget Neutrality
(Column 2)

Column 2 shows the effects of the changes to the MS-DRGs and
relative weights with the application of the recalibration budget
neutrality factor to the standardized amounts. Consistent with
section 1886(d)(4)(C)(iii) of the Act, we are calculating a
recalibration budget neutrality factor to account for the changes in
MS-DRGs and relative weights to ensure that the overall payment
impact is budget neutral. We revised the recalibration budget
neutrality factor in this notice because we applied a 0.25 reduction
to the market basket update to the standardized amount as required
under the Affordable Care Act.
The ``All Hospitals'' line in Column 1 indicates that proposed
changes due to MS-DRGs and relative weights will increase payments
by 0.3 percent before application of the budget neutrality factor.
The proposed recalibration budget neutrality factor is 0.996867,
which is applied to the standardized amount. Thus, the impact after
accounting only for budget neutrality for changes to the MS-DRG
relative weights and classification is somewhat lower than the
figures shown in Column 1 (approximately 0.3 percent).
Consequentially, urban and rural hospitals will not experience a
change in payments when recalibration budget neutrality is applied.

E. Effects of Proposed Wage Index Changes (Column 3)

Section 1886(d)(3)(E) of the Act requires that, beginning
October 1, 1993, we annually update the wage data used to calculate
the wage index. In accordance with this requirement, the proposed
wage index for acute care hospitals for FY 2011 is based on data
submitted for hospital cost reporting periods beginning on or after
October 1, 2006 and before October 1, 2007. The estimated impact of
the updated wage data on hospital payments is isolated in Column 3
by holding the other payment parameters constant in this simulation.
That is, Column 3 shows the percentage change in payments when going
from a model using the FY 2010 wage index, based on FY 2006 wage
data, and having a 100-percent occupational mix adjustment applied,
to a model using the FY 2011 pre-reclassification wage index, also
having a 100-percent occupational mix adjustment applied, based on
FY 2007 wage data (while holding other payment parameters such as
use of the Version 28.0 MS-DRG GROUPER constant). The occupational
mix adjustment is based on the FY 2008/2009 occupational mix survey.
The wage data was not affected by any of the provisions under the
Affordable Care Act for FY 2011.
Column 3 shows the impacts of updating the wage data using FY
2007 cost reports. Overall, the new wage data will lead to a 0.0
percent change for all hospitals before being combined with the wage
budget neutrality adjustment shown in Column 5. Among the regions,
the largest increase is in the rural Middle Atlantic region, which
experiences a 0.4 percent increase before applying an adjustment for
budget neutrality. The largest decline from updating the wage data
is seen in Urban East South Central (0.5 percent decrease).

F. Application of the Wage Budget Neutrality Factor (Column 4)

Column 4 shows the impact of the new wage data with the
application of the wage budget neutrality factor. In FY 2010, we
began calculating separate wage budget neutrality and recalibration
budget neutrality factors, in accordance with section 1886(d)(3)(E)
of the Act, which specifies that budget neutrality to account for
wage changes or updates made under that subparagraph must be made
without regard to the 62 percent labor-related share guaranteed
under section 1886(d)(3)(E)(ii) of the Act. Therefore, for FY 2011,
we are calculating the wage budget neutrality factor to ensure that
payments under updated wage data are budget neutral without regard
to the lower labor-related share of 62 percent applied to hospitals
with a wage index less than or equal to 1. In other words, the wage
budget neutrality is calculated under the assumption that all
hospitals receive the higher labor-related share of the standardized
amount. The wage budget neutrality factor is revised because the
market basket update to the standardized amount was reduced by 0.25
percent under the Affordable Care Act. Because the wage data changes
did not change overall payments (displayed in Column 3), the revised
wage budget neutrality factor is 1.00007, and the overall payment
change is 0.0 percent.

G. Combined Effects of Proposed MS-DRG and Wage Index Changes
(Column 5)

Section 1886(d)(4)(C)(iii) of the Act requires that changes to
MS-DRG reclassifications and the relative weights cannot increase or
decrease aggregate payments. In addition, section 1886(d)(3)(E) of
the Act specifies that any updates or adjustments to the wage index
are to be budget neutral. We computed a proposed wage budget
neutrality factor of 1.00007, and a proposed recalibration budget
neutrality factor of 0.996867 (which is applied to the Puerto Rico
specific standardized amount and the hospital-specific rates). The
product of the two budget neutrality factors is the cumulative wage
and recalibration budget neutrality factor. The proposed cumulative
wage and recalibration budget neutrality adjustment is 0.996937, or
approximately -0.3 percent, which is applied to the national
standardized amounts. Because the wage budget neutrality and the
recalibration budget neutrality are calculated under different
methodologies according to the statute, when the two budget
neutralities are combined and applied to the standardized amount,
the overall payment impact is not necessarily budget neutral.
However, in this proposed rule, we are estimating that the proposed
changes in the MS-DRG relative weights and updated wage data with
wage and budget neutrality applied will result in a 0.0 change in
payments.
We estimate that the combined impact of the proposed changes to
the relative weights and MS-DRGs and the proposed updated wage data
with budget neutrality applied will result in no change in payments
for urban or rural hospitals. Urban New England would experience a
0.6 decrease in payments due to reductions in their case-mix and
wages compared to the national average, while the urban Pacific area
would experience a 0.5 percent increase in payments because of above
average increases in wages and case-mix. Among the rural hospital
categories, rural South Atlantic hospitals would experience the
greatest decline in payment (-0.9 percent) primarily due to the
changes to MS-DRGs and the relative cost weights.

H. Effects of MGCRB Reclassifications (Column 6)

Our impact analysis to this point has assumed acute care
hospitals are paid on the basis of their actual geographic location
(with the exception of ongoing policies that provide that certain
hospitals receive payments on other bases than where they are
geographically located). The changes in Column 6 reflect the per
case payment impact of moving from this baseline to a simulation
incorporating the MGCRB decisions for FY 2011 which affect
hospitals' wage index area assignments.
By spring of each year, the MGCRB makes reclassification
determinations that will be effective for the next fiscal year,
which begins on October 1. The MGCRB may approve a hospital's
reclassification request for the purpose of using another area's
wage index value. Hospitals may appeal denials of MGCRB decisions to
the CMS Administrator. Further, hospitals have 45 days from
publication of the IPPS rule in the Federal Register to decide
whether to withdraw or terminate an approved geographic
reclassification for the following year. Provisions in the
Affordable Care Act required us to revert to FY 2008 average

[[Page 31103]]

hourly wage reclassification criteria for reclassifications
effective in FY 2011. Therefore, additional hospitals will qualify
for MGCRB reclassification compared to the FY 2011 IPPS/LTCH PPS
proposed rule (or will qualify for their primary reclassification),
published on May 4, 2010. This column reflects an expectation that
these additional hospitals will qualify for geographic
reclassification.
The overall effect of geographic reclassification is required by
section 1886(d)(8)(D) of the Act to be budget neutral. Therefore,
for the purposes of this impact analysis, we are applying an
adjustment of 0.995425 to ensure that the effects of the section
1886(d)(10) reclassifications are budget neutral (section II.A. of
the Addendum to this supplemental proposed rule). Geographic
reclassification generally benefits hospitals in rural areas. We
estimate that geographic reclassification will increase payments to
rural hospitals by an average of 1.6 percent. By region, all the
rural hospital categories will experience increases in payments due
to MGCRB reclassification where rural hospitals in the Mountain
region will experience a 0.1 percent increase in payments and rural
hospitals in the East South Central region will experience a 2.4
percent increase in payments.
Table 9A of the Addendum to this proposed rule reflects the
approved reclassifications for FY 2011.

I. Effects of the Rural Floor and Imputed Floor, Including
Application of National Budget Neutrality (Column 7)

As discussed in section III.B. of the preamble of the FY 2009
IPPS final rule, the FY 2010 IPPS/RY 2010 LTCH final rule and this
proposed rule, section 4410 of Public Law 105-33 established the
rural floor by requiring that the wage index for a hospital in any
urban area cannot be less than the wage index received by rural
hospitals in the same State. In FY 2008, we changed how we applied
budget neutrality to the rural floor. Rather than applying a budget
neutrality adjustment to the standardized amount, a uniform budget
neutrality adjustment is applied to the wage index. In the FY 2009
final rule, we finalized the policy to apply the rural floor budget
neutrality at the State level with a 3-year transition. In FY 2009,
hospitals received a blended wage index that is 20 percent of a wage
index with the State level rural and imputed floor budget neutrality
adjustment and 80 percent of a wage index with the national budget
neutrality adjustment. In FY 2010, hospitals received a blended wage
index that is 50 percent of a wage index with the State level rural
and imputed floor budget neutrality and 50 percent of a wage index
with the national budget neutrality adjustment. For FY 2011, the
Affordable Care Act requires that we apply one rural floor budget
neutrality to the wage index, nationally. The proposed FY 2011 rural
floor budget neutrality factor applied to the wage index is
0.995425.
Furthermore, the FY 2005 IPPS final rule (69 FR 49109)
established a temporary imputed floor for all urban States from FY
2005 to FY 2007. The rural floor requires that an urban wage index
cannot be lower than the wage index for any rural hospital in that
State. Therefore, an imputed floor was established for States that
do not have rural areas or rural IPPS hospitals. In the FY 2008 IPPS
final rule with comment period (72 FR 47321), we finalized our
proposal to extend the imputed floor for 1 additional year. In the
FY 2009 IPPS final rule (73 FR 48573), we extended the imputed floor
for an additional 3 years through FY 2011. In the FY 2011 IPPS/LTCH
PPS proposed rule published on May 4, 2010, we applied rural floor
budget neutrality at the State-level. However, the Affordable Care
Act requires that, effective for FY 2011, we apply rural floor and
imputed floor budget neutrality at the national level, as we did in
FY 2008.
Column 7 shows the projected impact of the rural floor and the
imputed floor with the national rural and imputed floor budget
neutrality factor applied to the wage index. The column compares the
proposed post-reclassification FY 2011 wage index of providers
before the rural floor adjustment and the post-reclassification FY
2011 wage index of providers with the rural floor and imputed floor
adjustment. Only urban hospitals can benefit from the rural floor
provision. Because the provision is budget neutral, all other
hospitals (that is, all rural hospitals and those urban hospitals to
which the adjustment is not made) experience a decrease in payments
due to the budget neutrality adjustment applied nationally to their
wage index.
We project that, in aggregate, rural hospitals will experience a
0.1 percent decrease in payments as a result of the application of
rural floor budget neutrality because the rural hospitals located in
States with a rural floor do not benefit from the rural floor, but
have their wage indexes downwardly adjusted to ensure that the
application of the rural floor is budget neutral overall within the
State. We project hospitals located in other urban areas
(populations of 1 million or fewer) will experience a 0.1 percent
increase in payments because those providers benefit from the rural
floor. Urban hospitals in the Pacific region can expect 0.9 percent
increase in payments because a large percentage of hospitals in this
region receive the rural floor. Urban hospitals in the Middle
Atlantic can expect a 0.1 percent increase in payments because New
Jersey hospitals receive the imputed floor with a national budget
neutrality adjustment. Rural hospitals in all regions can expect a
0.1 to 0.2 percent decrease in payments because the rural and
imputed floors only benefit urban hospitals.

J. Effects of the Proposed Application of the Frontier Wage Index
(Column 8)

Section 10324(a) of Affordable Care Act requires that we
establish a minimum post-reclassified wage-index of 1.00 for all
hospitals located in Frontier States. Frontier States are defined in
the statute as States with at least 50 percent of its counties with
a population density lesser than 6 persons per square mile. Based on
these criteria, five States (Montana, North Dakota, Nevada, South
Dakota, and Wyoming) are considered Frontier States and 51 hospitals
located in those States would receive a frontier wage index of 1.0.
This provision is not budget neutral and is estimated to increase
IPPS operating payments by approximately $48 million.
Urban hospitals located in the West North Central region and
urban hospitals located in the Mountain region will experience an
increase in payments by 0.5 percent and 0.2, respectively, because
many of the hospitals located in this region are frontier hospitals.
Similarly, rural hospitals located in the West North Central and
rural hospitals in the Mountain region will experience an increase
in payments by 0.1 and 0.5, respectively.

K. Effects of the Proposed Wage Index Adjustment for Out-Migration
(Column 9)

Section 1886(d)(13) of the Act, as added by section 505 of
Public Law 108-173, provides for an increase in the wage index for
hospitals located in certain counties that have a relatively high
percentage of hospital employees who reside in the county, but work
in a different area with a higher wage index. Hospitals located in
counties that qualify for the payment adjustment are to receive an
increase in the wage index that is equal to a weighted average of
the difference between the wage index of the resident county, post-
reclassification and the higher wage index work area(s), weighted by
the overall percentage of workers who are employed in an area with a
higher wage index. With the out-migration adjustment, small rural
providers with less than 100 beds will experience a 0.5 percent
increase in payments in FY 2011 relative to no adjustment at all. We
included these additional payments to providers in the impact table
shown above, and we estimate the impact of these providers receiving
the out-migration increase to be approximately $20 million.

L. Effects of All Proposed Changes Prior to Documentation and
Coding (or CMI) Adjustment (Column 10)

Column 10 shows our estimate of the changes in payments per
discharge from FY 2010 and FY 2011, resulting from all proposed
changes reflected in this supplemental rule and the May 4, 2010
IPPS/LTCH PPS proposed rule for FY 2011 (including statutory
changes), other than the proposed documentation and coding
adjustment. Column 10 reflects the impact of all other FY 2011
changes relative to FY 2010, including those shown in Columns 1
through 9. We note that our baseline FY 2010 operating estimates
account for the provisions under the Affordable Care Act that
affected the FY 2010 operating payments. The average increase in
payments under the IPPS for all hospitals is approximately 2.0
percent. This includes the 2.15 percent applicable percentage
increase (including the -0.25 reduction to the market basket
increase required under the Affordable Care Act). In addition, it
reflects the estimated 0.2 percentage point difference between the
projected outlier payments in FY 2010 (5.1 percent of total MS-DRG
payments), the current estimate of the percentage of actual outlier
payments in FY 2010 (4.9 percent) as described in the introduction
to this Appendix and the Addendum to this

[[Page 31104]]

proposed rule. Finally, it accounts for -0.2 percent decrease in
payments due to the expiration of Section 508 reclassifications that
had been extended for FY 2010 under the Affordable Care Act.
There might also be interactive effects among the various
factors comprising the payment system that we are not able to
isolate. For these reasons, the values in Column 10 may not equal
the sum of the percentage changes described above.

M. Effects of All FY 2011 Proposed Changes With CMI Adjustment
(Column 11)

Column 11 shows our estimate of the changes in payments per
discharge from FY 2010 and FY 2011, resulting from all proposed
changes reflected in the May 4, 2010 IPPS/LTCH PPS proposed rule for
FY 2011 and provisions described in this supplemental proposed rule
required under the Affordable Care (including statutory changes).
The FY 2010 baseline estimates account for the provisions under the
Affordable Care Act that affected the FY 2010 operating payments.
Specifically, the FY 2010 baseline payment estimates account for the
additional -0.25 reduction in the applicable percentage increase
applied to discharges for FY 2010 discharges occurring on or after
April 1, 2010 and accounts for the extension of Section 508
reclassifications for FY 2010. As discussed in the FY 2011 IPPS/LTCH
PPS proposed rule, this column includes the proposed FY 2011
documentation and coding adjustment of -2.9 percent on the national
standardized amount, -2.9 percent on the hospital-specific rates,
and -2.4 percent on the Puerto Rico-specific standardized amount,
which overall accounts for a 2.9 percent decrease in payments.
The average decrease in payments under the IPPS for all
hospitals is approximately -0.9 percent. As described in Column 10,
this average decrease includes the effects of the 2.15 percent
market basket update (including the -0.25 reduction in the
applicable percentage increase required under the Affordable Care
Act), the 0.2 percentage point difference between the projected
outlier payments in FY 2011 (5.1 percent of total MS-DRG payments),
and the current estimate of the percentage of actual outlier
payments in FY 2010 (4.9 percent). In addition, it includes a -0.2
percent decrease in payments due to the expiration of Section 508
reclassifications that had been extended for FY 2010 under the
Affordable Care Act. Section 508 reclassification was not a budget-
neutral provision. There might also be interactive effects among the
various factors comprising the payment system that we are not able
to isolate. For these reasons, the values in Column 11 may not equal
the sum of the percentage changes described above.
The overall proposed change in payments per discharge for
hospitals paid under the IPPS in FY 2011 is estimated to decrease by
0.9 percent. The payment decreases among the hospital categories are
largely attributed to the proposed documentation and coding
adjustments. Hospitals in urban areas would experience an estimated
0.8 percent decrease in payments per discharge in FY 2011 compared
to FY 2010. Hospital payments per discharge in rural areas are
estimated to decrease by 1.4 percent in FY 2011 as compared to FY
2010. The decreases larger than the national average for rural areas
are largely attributed to the differential impact of the MS-DRGs and
wage data and due to the -2.9 percent documentation and coding
adjustment applied to the national standardized amount and the -2.9
percent documentation and coding adjustment to the hospital-specific
rate applied to SCHs and MDHs, which generally are classified as
rural hospitals.
Among urban census divisions, the largest estimated payment
decreases will be 2.0 percent in the New England region and 1.4
percent in the Middle Atlantic region because many of the urban
providers in these regions had benefited from Section 508
reclassification in FY 2010 that has expired for FY 2011. Urban
hospitals in the Pacific will see the largest payment increases (0.6
percent) because urban providers in this region will benefit from
the rural floor and application of a national rural floor budget
neutrality factor. Among the rural regions, the providers in the New
England region will experience the largest decrease in payments (2.3
percent) because of the expiration of Section 508 reclassifications
while rural hospitals in the Mountain region will experience the
smallest decreases in payments by 0.4 percent because the rural
providers in this region benefit from MGCRB reclassification and the
Frontier wage index provision, required under the Affordable Care
Act.
Among special categories of rural hospitals, MDHs will receive
an estimated payment decrease of 1.1 percent. MDHs are paid the
higher of the IPPS rate based on the national standardized amount,
that is, the Federal rate, or, if the hospital-specific rate exceeds
the Federal rate, the Federal rate plus 75 percent of the difference
between the Federal rate and the hospital-specific rate. MDHs will
experience a decrease in payments because of the proposed
documentation and coding adjustments applied to both the hospital-
specific rate and the Federal rate. SCHs are also paid the higher of
their hospital-specific rate or the Federal rate. Overall, SCHs will
experience an estimated decrease in payments by 1.8 percent due to
the proposed documentation and coding adjustments to the national
standardized amount and the hospital-specific rates.
Rural hospitals reclassified for FY 2011 are anticipated to
receive a 1.0 percent payment decrease, and rural hospitals that are
not reclassifying are estimated to receive a payment decrease of 1.9
percent.
Cardiac hospitals are expected to experience a payment increase
of 0.3 percent in FY 2011 relative to FY 2010 due to increases in
payments attributable to changes in the MS-DRGs and relative
weights.

N. Impact Analysis of Table II

Table II presents the projected impact of the proposed changes
for FY 2011 as published in the May 4, 2010 FY 2011 IPPS/LTCH PPS
proposed rule and the provisions required under the Affordable Care
Act in this notice for urban and rural hospitals and for the
different categories of hospitals shown in Table I. It compares the
estimated average payments per discharge for FY 2010 with the
proposed payments per discharge for FY 2011, as calculated under our
models. The estimated FY 2010 payments per discharge incorporate the
provisions in the Affordable Care Act. Thus, this table presents, in
terms of the average dollar amounts paid per discharge, the combined
effects of the proposed changes presented in Table I. The estimated
percentage changes shown in the last column of Table II equal the
estimated percentage changes in average payments per discharge from
Column 11 of Table I.
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VII. Effects of Other Supplemental Proposed Policy Changes

In addition to those supplemental proposed policy changes
discussed above that we are able to model using our IPPS payment
simulation model, we are proposing to make various other changes in
this supplemental proposed rule. Generally, we have limited or no
specific data available with which to estimate the impacts of these
changes. Our estimates of the likely impacts associated with these
other supplemental proposed changes are discussed below.

A. Effects of the Supplemental Proposed Low-Volume Hospital Payment
Adjustment: Changes for FYs 2011 and 2012

The low-volume hospital payment adjustment changes for FYs 2011
and 2012, as discussed in section II.C. of the preamble to this
supplemental proposed rule, expands eligibility for the low-volume
hospital payment adjustment to hospitals with less than 1,600
Medicare discharges (instead of the prior requirement of less than
800 total, Medicare and non-Medicare, discharges) and more than 15
miles from other IPPS hospitals (rather than the prior requirement
of more than 25 miles). The payment adjustment is changed also, from
an empirically determined (69 FR 49099 through 49102 and 70 FR 47432
through 47434) additional 25 percent payment adjustment to
qualifying hospitals with less than 200 total discharges, to a
continuous, linear sliding scale adjustment ranging from an
additional 25 percent payment adjustment to hospitals with 200 or
less Medicare discharges to no additional payment to hospitals with
1,600 or more Medicare discharges.
We estimate, based on FY 2009 claims (MedPAR) data, an
additional 1,524 hospitals would meet the Medicare discharges
criterion to qualify as a low-volume hospital. However, we are not
able to estimate the number of these 1,524 hospitals that would also
meet the distance criterion. The actual number of hospitals that
would also meet the distance criterion to qualify as a low-volume
hospital would be less, very likely much less, than the estimated
1,524 maximum number of potential low-volume hospitals for FY 2011.
If all 1,524 hospitals that meet the Medicare discharge requirement
also meet the distance requirement, the additional Medicare IPPS
dollars the temporary change to the low-volume hospital payment
adjustment would require, at most, based on each hospital's number
of Medicare discharges and the corresponding payment adjustment
amount, an estimated $877 million for FY 2011. At this time, we are
not able to estimate the impact of the change for FY 2012.

B. Effects of the Supplemental Proposed Change for Medicare-
Dependent, Small Rural Hospitals

As discussed in section II.D. of the preamble to this
supplemental proposed rule, section 3124 of Public Law 111-148
extends the MDH program for 1 additional year, from the end of FY
2011 (that is, for discharges before October 1, 2011) to the end of
FY 2012 (that is, for discharges before October 1, 2012). The
extension has no impact on FY 2011. For FY 2012, the extension
allows the continuation of MDH status and the payment methodology,
for an MDH to be paid its hospital-specific rate, based on its FY
1982, 1987, or 2002 costs per discharge, rather than the Federal
rate, if this results in a greater aggregate payment (section II.D.
of the preamble to this supplemental proposed rule). Therefore, the
impact of the extension is one additional year of hospital-specific
rate payments for MDHs rather than Federal rate payments for IPPS
hospitals without special treatment as an MDH.

C. Effects of the Supplemental Proposed Additional Payments to
Qualifying Hospitals in Low Medicare Spending Counties

Under section 1109 of Public Law 111-152, Congress has allocated
$400 million to be spent for FYs 2011 and 2012 to qualifying
hospitals located in the bottom quartile of counties with the lowest
Medicare Part A and Part B spending per enrollee. In our proposal
described in section II.E. of the preamble to this supplemental
proposed rule, we have identified the list of eligible counties and
the qualifying hospitals located in those counties that would
receive the $400 million. We are proposing to spend $200 million in
FY 2011 and $200 million in FY 2012. This money will be given to the
qualifying hospitals by the FI or A/B MAC through a one-time annual
payment. In section II.E. of the preamble to this supplemental
proposed rule, Table 2 lists the distribution of payments among the
proposed list of qualifying hospitals. In addition, Table 3 in
section II.E. of the preamble to this supplemental

[[Page 31108]]

proposed rule lists the distribution of payment by State for FY
2011.

D. Effects of the Supplemental Proposed Implementation of the Rural
Community Hospital Demonstration Program

In section II.F. of the preamble of this supplemental rule, we
discuss our implementation of section 410A of Public Law 108-173,
which required the Secretary to establish a demonstration that would
modify reimbursement for inpatient services for up to 15 small rural
hospitals. Section 410A(c)(2) Public Law 108-173 requires that
``[i]n conducting the demonstration program under this section, the
Secretary shall ensure that the aggregate payments made by the
Secretary do not exceed the amount which the Secretary would have
paid if the demonstration program under this section was not
implemented.'' As discussed in section II.F. of the preamble of this
supplemental rule, in the IPPS final rule for each of the previous 6
fiscal years, we have estimated the additional payments as a result
of the demonstration for each of the participating hospitals. In
order to achieve budget neutrality, we are proposing to adjust the
national IPPS rates by an amount sufficient to account for the added
costs of this demonstration. In other words, we are proposing to
apply budget neutrality across the payment system as a whole rather
than merely across the participants of this demonstration. We
believe that the language of the statutory budget neutrality
requirement permits the agency to implement the budget neutrality
provision in this manner. The statutory language requires that
``aggregate payments made by the Secretary do not exceed the amount
which the Secretary would have paid if the demonstration * * * was
not implemented'' but does not identify the range across which
aggregate payments must be held equal.
An extension of this demonstration has been mandated by the
Affordable Care Act. The demonstration will be extended for an
additional 5 years and expanded to up to 30 hospitals. We are
proposing to make an adjustment in the FY 2011 IPPS/LTCH PPS final
rule of $69,279,673 to the national IPPS rates. This amount
($69,279,673) accounts for the following: (1) An estimate of the
demonstration cost for FY 2011 for the 10 hospitals that are
currently participating in the demonstration; (2) an estimate of the
cost of the continuation of the 7 hospitals that have participated
in the demonstration since its inception and that are still
participating--for the portions of their cost reporting periods in
FY 2010 that are not covered in the estimated cost of the
demonstration in the FY 2010 IPPS final rule because we formulated
these estimates under the assumption that the demonstration would
end in FY 2010; and (3) an estimate of the cost of participation in
the demonstration for 20 additional hospitals in FY 2011. Not
included in this amount is an adjustment that we proposed to make in
addition for the FY 2011 IPPS/LTCH PPS final rule to account for any
differences between the cost of the demonstration program for
hospitals participating in the demonstration during FY 2007, as
indicated by their settled cost reports beginning in FY 2007, and
the amount that was offset by the budget neutrality adjustment for
FY 2007. The specific numeric value associated with this component
of the proposed adjustment to the national IPPS rates cannot be
known until cost reports beginning in FY 2007 for the hospitals
participating during FY 2007 in the demonstration are settled. We
expect those cost reports to be settled prior to the publication of
the FY 2011 IPPS/LTCH PPS final rule, and that we will be able to
incorporate the estimated amount in the FY 2011 IPPS/LTCH PPS final
rule.

E. Effects of the Supplemental Proposed Payment for Critical Access
Hospital Outpatient Services and Ambulance Services

In section II.H. of the preamble of this supplemental proposed
rule, we discuss our proposal to implement section 3128 of Public
Law 111-148 by amending the regulations at Sec. 413.70(b)(3)(ii)(A)
to state that, effective for cost reporting periods beginning on or
after January 1, 2004, payment for outpatient facility services
under the optional method will also be made at 101 percent of
reasonable costs. We are also proposing to amend the regulations at
Sec. 413.70(b)(5)(i) to state that effective for cost reporting
periods beginning on or after January 1, 2004, payment for ambulance
services furnished by a CAH or an entity that is owned and operated
by a CAH is 101 percent of the reasonable costs of the CAH or the
entity in furnishing those services, but only if the CAH or the
entity is the only provider or supplier of ambulance services
located within a 35-mile drive of the CAH or the entity. We do not
believe these proposals will result in additional payments to CAHs
for prior periods because we believe that in fact we have paid CAHs
for these services at 101 percent of reasonable costs during these
prior periods.

VIII. Effects of Proposed Changes in the Capital IPPS

A. General Considerations

Provisions of Public Law 111-148 necessitated revising the May
4, 2010 FY 2011 IPPS/LTCH PPS proposed rule. While the proposed IPPS
payment rates for capital-related costs were not directly affected
by provisions of Public Law 111-148, changes to the wage index as
well as to the outlier payment adjustment factor were required by
the law. Changes to the wage index affect the geographic adjustment
factor (GAF) under the capital IPPS which is used in conjunction
with a factor for changes in DRG classifications and weights to
determine a proposed budget neutrality adjustment factor in
calculating the proposed capital IPPS rate. A revision of the
proposed outlier payment adjustment factor was required because both
inpatient operating and inpatient capital-related payments use a
single set of thresholds to identify outlier cases. Changes
resulting from the provisions of Public Law 111-148 are discussed in
more detail in section II.A. of the preamble of this supplemental
proposed rule.
The data used in developing the impact analysis presented below
are the same as that used for the impact analysis in the May 4, 2010
FY 2011 IPPS/LTCH PPS proposed rule--the December 2009 update of the
FY 2009 MedPAR file and the December 2009 update of the Provider-
Specific File (PSF) that is used for payment purposes. Although the
analyses of the changes to the capital prospective payment system do
not incorporate cost data, we used the December 2009 update of the
most recently available hospital cost report data (FYs 2006 and
2007) to categorize hospitals. Our analysis has several
qualifications. We use the best data available and make assumptions
about case-mix and beneficiary enrollment as described below. In
addition, as discussed in section V.E. of the Preamble to the May 4,
2010 FY 2011 IPPS/LTCH PPS proposed rule, we are proposing a -2.9
percent documentation and coding adjustment to the national capital
rate for FY 2011 in addition to the -0.6 percent adjustment
established for FY 2008, and the -0.9 percent adjustment for FY
2009. This results in a cumulative adjustment factor of 0.957 that
we are proposing to apply to the national capital rate to account
for improvements in documentation and coding under the MS-DRGs in FY
2011. We also are proposing to adjust the Puerto Rico-specific
capital rate in FY 2011 to account for changes in documentation and
coding resulting from the adoption of the MS-DRGs.
Due to the interdependent nature of the IPPS, it is very
difficult to precisely quantify the impact associated with each
change. In addition, we draw upon various sources for the data used
to categorize hospitals in the tables. In some cases (for instance,
the number of beds), there is a fair degree of variation in the data
from different sources. We have attempted to construct these
variables with the best available sources overall. However, for
individual hospitals, some miscategorizations are possible.
Using cases from the December 2009 update of the FY 2009 MedPAR
file, we simulated payments under the capital IPPS for revised FY
2010 and revised FY 2011 (both years have been revised to account
for provisions in the Affordable Care Act that required changes to
the wage index and outlier threshold, as discussed above in this
section) for a comparison of total payments per case. Any short-
term, acute care hospitals not paid under the general IPPS (Indian
Health Service hospitals and hospitals in Maryland) are excluded
from the simulations.
The basic methodology for determining a capital IPPS payment is
set forth at Sec. 412.312. The basic methodology for calculating
capital IPPS payments in FY 2011 is as follows:
(Standard Federal Rate) x (DRG weight) x (GAF) x (COLA for
hospitals located in Alaska and Hawaii) x (1 + DSH Adjustment Factor
+ IME adjustment factor, if applicable).
In addition to the other adjustments, hospitals may also receive
outlier payments for those cases that qualify under the threshold
established for each fiscal year. We modeled payments for each
hospital by multiplying the capital Federal rate by the GAF and the
hospital's case-mix. We then added estimated payments for indirect
medical education, disproportionate share, and outliers, if
applicable. For purposes of

[[Page 31109]]

this impact analysis, the model includes the following assumptions
(we note that these are the same assumptions used for the impact
analysis in the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24310):
We estimate that the Medicare case-mix index will
increase by 1.0 percent in both FYs 2010 and 2011.
We estimate that the Medicare discharges will be
approximately 11.8 million in FY 2010 and 12 million FY 2011.
The capital Federal rate was updated beginning in FY
1996 by an analytical framework that considers changes in the prices
associated with capital-related costs and adjustments to account for
forecast error, changes in the case-mix index, allowable changes in
intensity, and other factors. The proposed factors used in the
update framework are not affected by the provisions of Pub. L. 111-
148, as amended, and therefore, remains at the proposed 1.5 percent
for FY 2011, as discussed in section III.A.1. of the May 4, 2010 FY
2011 I PPS/LTCH PPS proposed rule.
In addition to the proposed FY 2011 update factor, the
proposed FY 2011 capital Federal rate was calculated based on a
proposed GAF/DRG budget neutrality factor of 1.0015, a proposed
outlier adjustment factor of 0.9432, and a proposed (special)
exceptions adjustment factor of 0.9997.
For FY 2011, as discussed above and in section V.E. of
the preamble to the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule,
we are proposing to apply a 0.957 adjustment to the proposed FY 2011
national capital rate for changes in documentation and coding that
are expected to increase case-mix under the MS-DRGs.

B. Results

We used the actuarial model described above to estimate the
potential impact of our proposed changes for FY 2011 on total
capital payments per case, using a universe of 3,472 hospitals. As
described above, the individual hospital payment parameters are
taken from the best available data, including the December 2009
update of the FY 2009 MedPAR file, the December 2009 update to the
PSF, and the most recent cost report data from the December 2009
update of HCRIS. In Table III, we present a comparison of estimated
total payments per case for FY 2010, as revised per the Affordable
Care Act, compared to FY 2011 based on the proposed FY 2011 payment
policies. Column 2 shows estimates of payments per case under our
model for FY 2010 (as revised). Column 3 shows estimates of payments
per case under our model for FY 2011. Column 4 shows the total
percentage change in payments from revised FY 2010 to FY 2011. The
change represented in Column 4 includes the proposed 1.5 percent
update to the capital Federal rate and other proposed changes in the
adjustments to the capital Federal rate. The comparisons are
provided by: (1) Geographic location; (2) region; and (3) payment
classification.
The simulation results show that, on average, capital payments
per case in FY 2011 are expected to decrease as compared to capital
payments per case in FY 2010. The proposed capital rate for FY 2011
would increase 1.5 percent as compared to the FY 2010 capital rate.
The proposed changes to the GAFs are expected to result, on average,
in a slight decrease in capital payments, although, for rural
regions, it is more of a contributing factor to the overall decrease
in capital payments than to urban areas mostly due to the
application of the rural floor to the wage index. We also are
estimating an increase in outlier payments from FY 2010 to FY 2011
due primarily to an estimated decrease in capital IPPS payments per
discharge. Since capital payments per discharge are projected to be
slightly lower in FY 2011 compared to FY 2010, more cases would
qualify for outlier payments. Because our impact analysis includes
actuarial assumptions of growth from FY 2010 to FY 2011, the
analysis shows a slight increase in capital payments. However, the
net impact of these proposed changes is an estimated -0.2 percent
change in capital payments per discharge from FY 2010 to FY 2011 for
all hospitals (as shown below in Table III).
The geographic comparison shows that, on average, all urban
hospitals, as well as hospitals in large urban areas, are expected
to experience a 0.1 percent decrease in capital IPPS payments per
case in FY 2011 as compared to FY 2010. Capital IPPS payments per
case for rural hospitals are expected to decrease 0.6 percent.
The change comparisons by regions show some regions experiencing
slight increases in total capital payments, while other regions are
estimated to experience slight decreases in capital payments from FY
2010 to FY 2011. For the urban regions, changes in capital payments
range from a -1.6 percent in the New England region to an increase
of 1.4 percent for the Pacific region. The rural regions show
estimates of a -2.4 percent change in capital payments from FY 2010
to FY 2011 in the New England rural region to a 2.1 percent increase
for the Mountain rural region.
By type of ownership, proprietary hospitals are estimated to
experience a 0.2 percent change in capital payments, voluntary
hospitals are estimated to experience a 0.3 percent decrease in
capital payments per case, while there is no change estimated for
government hospitals in capital payments per case from FY 2010 to FY
2011.
Section 1886(d)(10) of the Act established the MGCRB. Hospitals
may apply for reclassification for purposes of the wage index for FY
2011. Reclassification for wage index purposes also affects the GAFs
because that factor is constructed from the hospital wage index.
To present the effects of the hospitals being reclassified for
FY 2011, we show the average capital payments per case for
reclassified hospitals for FY 2010, as revised per the Affordable
Care Act. All classifications of reclassified hospitals are expected
to experience a decrease in capital payments in FY 2011 as compared
to FY 2010. Urban reclassified and rural reclassified hospitals are
expected to have a decrease in capital payments of -0.4 percent and
-0.3 percent, respectively. No change is estimated in capital
payments for urban non-reclassified hospitals, while rural non-
reclassified hospital capital payments are estimated to decrease 0.9
percent. Other reclassified hospitals (that is, hospitals
reclassified under section 1886(d)(8)(B) of the Act) are expected to
experience a decrease of 1.6 percent in capital payments from FY
2010 to FY 2011.
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IX. Effects of Supplemental Proposed Payment Rate Changes and Policy
Changes Under the LTCH PPS

A. Introduction and General Considerations

In section II.J. of the preamble and section III. of the
Addendum of this proposed rule, we are setting forth the proposed
annual update to the payment rates for the LTCH PPS for FY 2011. In
the preamble, we specify the statutory authority for the proposed
provisions that are presented, identify those proposed policies and
present rationale for our decisions as well as alternatives that
were considered. In this section IX. of Appendix to this
supplemental proposed rule, we discuss the impact of the proposed
changes to the payment rates, factors, and other payment rate
policies related to the LTCH PPS that are presented in the preamble
of this proposed rule in terms of their estimated fiscal impact on
the Medicare budget and on LTCHs.
A number of the provisions of the Affordable Care Act affect the
IPPS and the LTCH PPS and the providers and suppliers addressed in
the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule and this
supplemental proposed rule. The impacts of the Appendix to this
supplemental proposed rule include the provisions from these laws
effective for FY 2011.
Currently, our database of 421 LTCHs includes the data for 77
nonprofit (voluntary ownership control) LTCHs and 301 proprietary
LTCHs. Of the remaining 43 LTCHs, 12 LTCHs are government-owned and
operated and the ownership type of the other 31 LTCHs is unknown. In
the impact analysis, we are using the proposed rates, factors, and
policies presented in this supplemental proposed rule, including the
0.50 percentage point reduction to the market basket update required
by sections 1886(m)(3) and (4) of the Act and the proposed updated
wage index values and the labor-related share (presented in the May
4, 2010 FY 2010 IPPS/LTCH PPS proposed rule), and the best available
claims and CCR data to estimate the change in payments for FY 2011.
The standard Federal rate for RY 2010 is $39,794.95, which reflects
the 0.25 percentage point reduction applied to the RY 2010 market
basket update required under sections 1886(m)(3) and (4) of the Act
(as established in a separate notice published elsewhere in this
Federal Register). Discharges in RY 2010 occurring on or after April
1, 2010 are aid under the revised RY 2010 standard Federal rate
consistent with section 3401(p) of Public Law 111-148. Discharges in
RY 2010 occurring on or after October 1, 2009 and on or before March
31, 2010 are paid under the standard Federal rate of $39,896.65 (see
74 FR 44022).
As discussed in section III.A.3. of the Addendum to this
proposed rule, consistent with our historical practice, we are
proposing to update the standard Federal rate for FY 2011 by -0.59
percent in order to establish the proposed FY 2011 standard Federal
rate at $39,560.16. This includes a proposed market basket update of
2.4 percent with a 0.50 percentage point reduction as required under
sections 1886(m)(3) and (4) of the Act, and a proposed documentation
and coding adjustment of -2.5 percent to account for increases in
case-mix associated with the adoption of the MS-LTC-DRGs. Based on
the best available data for the 421 LTCHs in our database, we
estimate that the proposed update to the standard Federal rate for
FY 2011 (discussed in section III.A.3. of the Addendum of this
supplemental proposed rule) and the proposed changes to the area
wage adjustment for FY 2011 (discussed in section V.B. of the
Addendum to the May 4, 2010 IPPS/LTCH PPS FY 2011 IPPS/LTCH PPS
proposed rule (75 FR 24085 through 24086)), in addition to an
estimated increase in HCO payments and an estimated increase in SSO
payments, would result in an increase in estimated payments from RY
2010 of approximately $12.9 million (or about 0.3 percent). Based on
the 421 LTCHs in our database, we estimate RY 2011 LTCH PPS payments
to be approximately $4.913 billion, an increase from FY 2010 LTCH
PPS

[[Page 31112]]

payments of approximately $4.901 billion. Because the combined
distributional effects and estimated changes to the Medicare program
payments would be greater than $100 million, this proposed rule, in
conjunction with the May 4, 2010 IPPS/LTCH PPS FY 2011 IPPS/LTCH PPS
proposed rule, is considered a major economic rule, as defined in
this section. We note the approximately $12.9 million for the
projected increase in estimated aggregate LTCH PPS payments from RY
2010 to FY 2011 does not reflect changes in LTCH admissions or case-
mix intensity in estimated LTCH PPS payments, which also would
affect overall payment changes.
The projected 0.3 percent increase in estimated payments per
discharge from RY 2010 to FY 2011 is attributable to several
factors, including the proposed -0.59 percent decrease to the
standard Federal rate, proposed changes in the wage index values
(including the proposed change to the labor-related share) presented
in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24085
through 24086) and projected increases in estimated HCO and SSO
payments. As Table IV shows, the proposed change attributable solely
to the standard Federal rate is projected to result in a decrease of
0.5 percent in estimated payments per discharge from RY 2010 to FY
2011, on average, for all LTCHs, while the proposed changes to the
area wage adjustment are projected to result in an increase in
estimated payments of 0.1 percent, on average, for all LTCHs.
As discussed in the May 4, 2010 FY 2011 IPPS/LTCH proposed rule
(75 FR 24085 through 24086), we are proposing to update the wage
index values for FY 2011 based on the most recent available data. In
addition, we are proposing to decrease the labor-related share
slightly from 75.779 percent to 75.407 percent under the LTCH PPS
for FY 2011 based on the most recent available data on the relative
importance of the labor-related share of operating and capital costs
of the RPL market basket. Consistent with the May 4, 2010 FY 2011
IPPS/LTCH proposed rule, the wage data and the labor-related share
is expected to increase LTCH PPS payments by 0.1 percent (75 FR
24317 through 27318).
Table IV below shows the impact of the proposed payment rate and
proposed policy changes on LTCH PPS payments for FY 2011 presented
in this supplemental proposed rule, in conjunction with the May 4,
2010 FY 2011 IPPS/LTCH PPS proposed rule, by comparing RY 2010
estimated payments to FY 2011 estimated payments. The projected
increase in payments per discharge from RY 2010 to FY 2011 is 0.3
percent (shown in Column 8). This projected increase in payments is
attributable to the impacts of the proposed change to the standard
Federal rate (-0.5 percent in Column 6) and the proposed change due
to the area wage adjustment (0. percent in Column 7), as well as the
effect of the estimated increase in payments for HCO cases and SSO
cases in FY 2011 as compared to RY 2010 (0.5 percent and 0.3
percent, respectively). That is, estimated total HCO payments are
projected to increase from RY 2010 to FY 2011 in order to ensure
that estimated HCO payments will be 8 percent of total estimated
LTCH PPS payments in FY 2011. An analysis of the most recent
available LTCH PPS claims data (that is, FY 2009 claims from the
December 2009 update of the MedPAR files) indicates that the RY 2010
HCO threshold of $18,615 (as established in a separate notice
published elsewhere in this Federal Register) may result in HCO
payments in RY 2010 that fall below the estimated 8 percent.
Specifically, we currently estimate that HCO payments will be
approximately 7.5 percent of estimated total LTCH PPS payments in RY
2010. We note that the RY 2010 outlier payment estimate in this
impact analysis takes into account for the revised RY 2010 rate and
outlier threshold determined consistent with sections 1886(m)(3) and
(4) of the Act and section 3401(p) of Public Law 111-148 that are
used to make payments for discharges in RY 2010 that occur on or
after April 1, 2010. Consistent with our estimate in the May 4, 2010
FY 2011 IPPS/LTCH PPS proposed rule, we estimate that the impact of
the increase in HCO payments would result in approximately a 0.5
percent increase in estimated payments from RY 2010 to FY 2011 on
average for all LTCHs. Furthermore, in calculating the estimated
increase in payments from RY 2010 to FY 2011 for HCO and SSO cases,
we increased estimated costs by the applicable market basket
percentage increase as projected by our actuaries, which increases
payments by 0.3 percent relative to last year. We note that
estimated payments for all SSO cases comprise approximately 14
percent of estimated total LTCH PPS payments, and estimated payments
for HCO cases comprise approximately 8 percent of estimated total
LTCH PPS payments. Payments for HCO cases are based on 80 percent of
the estimated cost of the case above the HCO threshold, while the
majority of the payments for SSO cases (over 65 percent) are based
on the estimated cost of the SSO case.
As we discuss in detail throughout this supplemental proposed
rule, based on the most recent available data, we believe that the
provisions of this supplemental proposed rule in conjunction with
the provisions of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed
rule, relating to the LTCH PPS will result in an increase in
estimated aggregate LTCH PPS payments and that the resulting LTCH
PPS payment amounts result in appropriate Medicare payments.

B. Impact on Rural Hospitals

For purposes of section 1102(b) of the Act, we define a small
rural hospital as a hospital that is located outside of an urban
area and has fewer than 100 beds. As shown in Table IV, we are
projecting a 0.7 percent increase in estimated payments per
discharge for FY 2011 as compared to RY 2010 for rural LTCHs that
would result from the proposed changes presented in this
supplemental proposed rule and those changes in the May 4, 2010 FY
2011 IPPS/LTCH PPS proposed rule as well as the effect of estimated
changes to HCO and SSO payments. This estimated impact is based on
the data for the 26 rural LTCHs in our database of 421 LTCHs, for
which complete data were available. The RY 2010 average payment per
case in Table IV accounts for the changes required by sections
1886(m)(3) and (4) of the Act and section 3401(p) of Public Law 111-
148 which affects payments for discharges occurring on or after
April 1, 2010, as described below in section IX.C.3. of the Appendix
to this supplemental proposed rule.
Consistent with the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed
rule, the estimated increase in LTCH PPS payments from RY 2010 to FY
2011 for rural LTCHs is primarily due to the higher than average
impacts from the proposed changes to the area wage adjustment and
the proposed reduction in the labor-related share from 75.779 to
75.407, which results in a estimated 0.6 percent increase in
payments.

C. Anticipated Effects of Proposed LTCH PPS Payment Rate Change and
Policy Changes

We discuss the impact of the proposed changes to the payment
rates, factors, and other payment rate policies under the LTCH PPS
for FY 2011 (in terms of their estimated fiscal impact on the
Medicare budget and on LTCHs) in section II.I. of the preamble of
this supplemental proposed rule.

1. Budgetary Impact

Section 123(a)(1) of the BBRA requires that the PPS developed
for LTCHs ``maintain budget neutrality.'' We believe that the
statute's mandate for budget neutrality applies only to the first
year of the implementation of the LTCH PPS (that is, FY 2003).
Therefore, in calculating the FY 2003 standard Federal rate under
Sec. 412.523(d)(2), we set total estimated payments for FY 2003
under the LTCH PPS so that estimated aggregate payments under the
LTCH PPS were estimated to equal the amount that would have been
paid if the LTCH PPS had not been implemented.
As discussed in section IX.A. of this Appendix, we project an
increase in aggregate LTCH PPS payments in FY 2011 of approximately
$12.9 million (or 0.3 percent) based on the 421 LTCHs in our
database.

2. Impact of Moratorium and Other Provisions

Section 114(c) and (d) of the Medicare, Medicaid, and SCHIP
Extension Act of 2007 (MMSEA) as amended by section 4302 of the
American Recovery and Reinvestment Act of 2009 (ARRA) provided for a
3-year delay in certain payment policies relating to LTCHs and LTCH
satellite facilities. Section 3106 of Public Law 111-148 and section
10312 of Public Law 111-148 together provide for a 2-year extension
of the 3-year delay in implementation of certain payment policies
relating to LTCHs and LTCH satellite facilities. Specifically, these
provisions affect payment adjustments for ``very'' short stay
outliers (SSOs), the one-time adjustment to the standard Federal
rate, the 25 percent payment threshold policy, and the moratorium on
the establishment of new LTCHs and LTCH satellite facilities and the
moratorium on the increase on LTCH beds in existing LTCHs or
satellite facilities.
Sections 3106 and 10312 of Public Law 111-148 together provide
for a 2-year extension of the 3-year delay in implementation of the
revision to the SSO

[[Page 31113]]

policy at Sec. 412.529(c)(3)(i) that was finalized in the RY 2008
final rule. We estimate that the extension of the SSO provision will
result in a projected increase in estimated aggregate LTCH PPS
payments of approximately $20 million in FY 2011. Sections 3106 and
10312 of Public Law 111-148 together provide for a 2-year extension
to several modifications to the regulations at Sec. 412.534 and
Sec. 412.536 required by section 114(c) of MMSEA as amended by
section 4302 of the ARRA, which addressed the percentage thresholds
between referring hospitals and LTCHs and satellites of LTCHs. We
estimate that the implementation of this extension of the MMSEA
provisions, as amended by the ARRA, pertaining to Sec. 412.534 and
Sec. 412.536 will result in a projected increase in estimated
aggregate LTCH PPS payments of approximately $20 million for FY
2011.
Regarding the 2-year extension of the moratorium on the
development of new LTCHs and LTCH satellites and the increase in
beds in existing LTCHs and LTCH satellites, as we noted in the May
22, 2008 interim final rule with comment period when the original 3-
year delay required by section 114(d) of the MMSEA as amended by the
ARRA, was implemented, we are unable to quantify the impact of the
additional 2 year moratorium on the establishment of LTCHs, LTCH
satellite facilities, and on the increase of LTCH beds in existing
LTCHs or satellite facilities with limited exceptions. We are unable
to provide an estimate of the impact of the 2-year extension of this
provision because we have no way of determining how many LTCHs would
have opened in the absence of the moratorium, nor do we have
sufficient information at this time to determine how many new LTCHs
will meet the exceptions criteria provided for in the statute.

3. Impact on Providers

The basic methodology for determining a per discharge LTCH PPS
payment is set forth in Sec. 412.515 through Sec. 412.536. In
addition to the basic MS-LTC-DRG payment (standard Federal rate
multiplied by the MS-LTC-DRG relative weight), we make adjustments
for differences in area wage levels, COLA for Alaska and Hawaii, and
SSOs. Furthermore, LTCHs may also receive HCO payments for those
cases that qualify based on the threshold established each year.
To understand the impact of the proposed changes to the LTCH PPS
payments presented in this supplemental proposed rule on different
categories of LTCHs for FY 2011, it is necessary to estimate
payments per discharge for RY 2010 using the rates, factors,
including the FY 2010 GROUPER (Version 27.0) and relative weights,
and policies established in the FY 2010 IPPS/RY 2010 LTCH PPS final
rule (74 FR 43945 through 43994 and 44021 through 44030) and to
include any changes to payments due to the provisions under sections
1886(m)(3) and (4) of the Act and section 3401(p) of Public Law 111-
148 which affects payments for discharges occurring on or after
April 1, 2010 in RY 2010 (as established in a separate notice
published elsewhere in this Federal Register). It is also necessary
to estimate the payments per discharge that would be made under the
proposed revised LTCH PPS rates, factors, policies, and GROUPER
(Version 28.0) for FY 2011 (as discussed in II.J. of the preamble
and section III.A. of the Addendum to this supplemental proposed
rule and section VII. of the preamble and section V. of the Addendum
of the May 4, 2011 IPPS/LTCH PPS FY 2011 proposed rule). These
estimates of RY 2010 and FY 2011 LTCH PPS payments are based on the
best available LTCH claims data and other factors, such as the
application of inflation factors to estimate costs for SSO and HCO
cases in each year. We also evaluated the change in estimated RY
2010 payments to estimated FY 2011 payments (on a per discharge
basis) for each category of LTCHs.
Hospital groups were based on characteristics provided in the
OSCAR data, FY 2006 through FY 2007 cost report data in HCRIS, and
PSF data. Hospitals with incomplete characteristics were grouped
into the ``unknown'' category. Hospital groups include the
following:
Location: Large urban/other urban/rural.
Participation date.
Ownership control.
Census region.
Bed size.
To estimate the impacts of the payment rates and policy changes
among the various categories of existing providers, we used LTCH
cases from the FY 2009 MedPAR file to estimate payments for RY 2010
and to estimate payments for FY 2011 for 421 LTCHs. We believe that
the discharges based on the FY 2009 MedPAR data for the 421 LTCHs in
our database, which includes 301 proprietary LTCHs, provide
sufficient representation in the MS-LTC-DRGs containing discharges
for patients who received LTCH care for the most commonly treated
LTCH patients' diagnoses.

4. Calculation of Prospective Payments

For purposes of this impact analysis, to estimate per discharge
payments under the LTCH PPS, we simulated payments on a case-by-case
basis using LTCH claims from the FY 2009 MedPAR files. For modeling
estimated LTCH PPS payments for RY 2010, we calculated a blended RY
2010 payment to account for changes in the rate in accordance with
sections 1886(m)(3) and (4) of the Act and section 3401(p) of Public
Law 111-148. Specifically, we applied the RY 2010 standard Federal
rate (that is, $39,896.65, under which LTCH discharges occurring on
or after October 1, 2009, and through March 31, 2010 are paid, and
$39,794.95, under which LTCH discharges occurring on or after April
1, 2010 to September 30, 2010 are paid). For modeling estimated LTCH
PPS payments for FY 2011, we applied the proposed FY 2011 standard
Federal rate of $39,560.16, which would be effective for LTCH
discharges occurring on or after October 1, 2010, and through
September 30, 2011.
Furthermore, in modeling estimated LTCH PPS payments for both RY
2010 and FY 2011 in this impact analysis, we applied the RY 2010 and
proposed FY 2011 adjustments for area wage differences and the COLA
for Alaska and Hawaii. Specifically, we adjusted for area wage
differences for estimated RY 2010 payments using the current LTCH
PPS labor-related share of 75.779 percent (74 FR 43968), the wage
index values established in the Tables 12A and 12B of the Addendum
to the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 44192 through
44213) and the RY 2010 COLA factors shown in the table in section V.
of the Addendum to that final rule (74 FR 44026). Similarly, we
adjusted for area wage differences for estimated FY 2011 payments
using the proposed LTCH PPS FY 2011 labor-related share of 75.407
percent (section VII.C.2.d. in the May 4, 2010 FY 2011 IPPS/LTCH PPS
proposed rule), the FY 2011 proposed wage index values presented in
Tables 12A and 12B of the Addendum to this proposed rule, and the FY
2011 COLA factors shown in the table in section V.B.5. of the
Addendum to the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule.
As discussed above, our impact analysis reflects an estimated
change in payments for SSO cases as well as an estimated increase in
payments for HCO cases (as described in section V.C. of the Addendum
to this proposed rule). In modeling proposed payments for SSO and
HCO cases in RY 2010, we applied an inflation factor of 1.024
percent (determined by OACT) to the estimated costs of each case
determined from the charges reported on the claims in the FY 2009
MedPAR files and the best available CCRs from the December 2009
update of the PSF. In modeling proposed payments for SSO and HCO
cases in FY 2011, we applied an inflation factor of 1.049
(determined by OACT) to the estimated costs of each case determined
from the charges reported on the claims in the FY 2009 MedPAR files
and the best available CCRs from the December 2009 update of the
PSF. Furthermore, in modeling estimated LTCH PPS payments for both
RY 2010 and FY 2011 in this impact analysis, we applied the RY 2010
HCO fixed-loss amount of $18,425 (74 FR 44029) for the first half of
RY 2010, the revised RY 2010 HCO fixed-loss amount of $18,615
established in conjunction with implementing the provisions of
sections 1886(m)(3) and (4) of the Act and section 3401(p) of Public
Law 111-148 for the second half of RY 2010, and the proposed FY 2011
fixed loss amount of $19,254 (as discussed in section III.A. of the
Addendum of this supplemental proposed rule).
These impacts reflect the estimated ``losses'' or ``gains''
among the various classifications of LTCHs from the RY 2010 to FY
2011 based on the proposed payment rates and policy changes
presented in this proposed rule. Table IV illustrates the estimated
aggregate impact of the LTCH PPS among various classifications of
LTCHs.
The first column, LTCH Classification, identifies the
type of LTCH.
The second column lists the number of LTCHs of each
classification type.
The third column identifies the number of LTCH cases.
The fourth column shows the estimated payment per
discharge for RY 2010 (as described above).
The fifth column shows the estimated payment per
discharge for FY 2011 (as described above).
The sixth column shows the percentage change in
estimated payments per discharge from RY 2010 to FY 2011 for
proposed changes to the standard Federal rate (as

[[Page 31114]]

discussed in section III.A.3. of the Addendum to this supplemental
proposed rule).
The seventh column shows the percentage change in
estimated payments per discharge from RY 2010 to FY 2011 for
proposed changes to the area wage adjustment at Sec. 412.525(c) (as
discussed in section V.B. of the Addendum to the May 4, 2010 FY 2011
IPPS/LTCH PPS proposed rule).
The eighth column shows the percentage change in
estimated payments per discharge from RY 2010 (Column 4) to FY 2011
(Column 5) for all proposed and statutory changes (and includes the
effect of estimated changes to HCO and SSO payments).
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BILLING CODE 4120-01-C

5. Results

Based on the most recent available data (as described previously
for 421 LTCHs, we have prepared the following summary of the impact
(as shown in Table IV) of the proposed LTCH PPS payment rate and
policy changes presented in this supplemental proposed rule. The
impact analysis in Table IV shows that estimated payments per
discharge are expected to increase approximately 0.3 percent, on
average, for all LTCHs from RY 2010 to FY 2011 as a result of the
proposed payment rate and policy changes presented in this
supplemental proposed rule and the May 4, 2010 FY 2011 IPPS/LTCH PPS
proposed rule, as well as estimated increases in HCO and SSO
payments. We note that we are proposing a -0.59 percent increase to
the standard Federal rate for FY 2011, based on the latest proposed
market basket estimate (2.4 percent), the -0.50 percent reduction to
the annual update required under of sections 1886(m)(3) and (4) of
the Act, and the proposed adjustment for the cumulative effect of
changes in documentation and coding in FYs 2008 and 2009 (-2.5
percent). We noted earlier in this section that for most categories
of LTCHs, as shown in Table IV (Column 6), the impact of the
proposed decrease of approximately -0.6 percent to the standard
Federal rate is projected to result in approximately a -0.5 percent
decrease in estimated payments per discharge for all LTCHs from RY
2010 to FY 2011. Because payments to cost-based SSO cases and a
portion of payments to SSO cases that are paid based on the
``blend'' option of

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the SSO payment formula at Sec. 412.529(c)(2)(iv) are not affected
by the proposed update to the standard Federal rate, we estimate
that the effect of the proposed 0.59 percent reduction to the
standard Federal rate would result in a 0.5 percent reduction on
estimated aggregate LTCH PPS payments to all LTCH PPS cases,
including SSO cases. Furthermore, as discussed previously in this
regulatory impact analysis, the average increase in estimated
payments per discharge from the RY 2010 to FY 2011 for all LTCHs of
approximately 0.3 percent (as shown in Table IV) was determined by
comparing estimated FY 2011 LTCH PPS payments (using the proposed
rates, proposed policies and statutory changes discussed in this
supplemental proposed rule and in the May 4, 2010 FY 2011 IPPS/LTCH
PPS proposed rule) to estimated RY 2010 LTCH PPS payments (as
described above in section IX.C.3. of this Appendix).

a. Location

Based on the most recent available data, the vast majority of
LTCHs are located in urban areas. Only approximately 6 percent of
the LTCHs are identified as being located in a rural area, and
approximately 4 percent of all LTCH cases are treated in these rural
hospitals. The impact analysis presented in Table IV shows that the
average percent increase in estimated payments per discharge from RY
2010 to FY 2011 for all hospitals is 0.3 percent for all proposed
changes. For rural LTCHs, the percent change for all proposed
changes is estimated to be 0.7 percent, while for urban LTCHs, we
estimate the increase to be 0.2 percent. Large urban LTCHs are
projected to experience an increase of 0.3 percent in estimated
payments per discharge from RY 2010 to FY 2011, while other urban
LTCHs are projected to experience an increase of 0.1 percent in
estimated payments per discharge from RY 2010 to FY 2011, as shown
in Table IV.

b. Participation Date

LTCHs are grouped by participation date into four categories:
(1) Before October 1983; (2) between October 1983 and September
1993; (3) between October 1993 and September 2002; and (4) after
October 2002. Based on the most recent available data, the majority
(approximately 49 percent) of the LTCH cases are in hospitals that
began participating between October 1993 and September 2002, and are
projected to experience nearly the average increase (0.2 percent) in
estimated payments per discharge from RY 2010 to FY 2011, as shown
in Table IV.
In the participation category where LTCHs began participating in
Medicare before October 1983, LTCHs are projected to experience a
higher than average percent increase (0.6 percent) in estimated
payments per discharge from RY 2010 to FY 2011, as shown in Table
IV. Approximately 4 percent of LTCHs began participating in Medicare
before October 1983. The LTCHs in this category are projected to
experience a higher than average increase in estimated payments
because of increases in their wage data, increase under the proposed
MS-LTC-DRG GROUPER (Version 28) and relative weights, and also
because of estimated increases in their SSO payments relative to
last year. Approximately 10 percent of LTCHs began participating in
Medicare between October 1983 and September 1993. These LTCHs are
projected to experience a slightly above average increase (0.4
percent) in estimated payments from RY 2010 to FY 2011. LTCHs that
began participating in Medicare after October 2002 currently
represent approximately 38 percent of all LTCHs, and are projected
to experience an average increase (0.3 percent) in estimated
payments from RY 2010 to FY 2011.

c. Ownership Control

Other than LTCHs whose ownership control type is unknown, LTCHs
are grouped into three categories based on ownership control type:
voluntary, proprietary, and government. Based on the most recent
available data, approximately 18 percent of LTCHs are identified as
voluntary (Table IV). We expect that, for these LTCHs in the
voluntary category, estimated FY 2011 LTCH payments per discharge
will increase higher than the average (0.6 percent) in comparison to
estimated payments in RY 2010 primarily because we project an
increase in estimated HCO payments and SSO payments to be higher
than the average for these LTCHs. The majority (71 percent) of LTCHs
are identified as proprietary and these LTCHs are projected to
experience an average increase (0.2 percent) in estimated payments
per discharge from RY 2010 to FY 2011. Finally, government-owned and
operated LTCHs (3 percent) are expected to experience a higher than
the average increase (0.7 percent) in estimated payments primarily
due to a larger than the average increase in estimated HCO payments
and increases under the proposed MS-LTC-DRG GROUPER (Version 28) and
relative weights.

d. Census Region

Estimated payments per discharge for FY 2011 are projected to
increase for LTCHs located in all regions in comparison to RY 2010.
Of the 9 census regions, we project that the increase in estimated
payments per discharge will have the largest positive impact on
LTCHs in the New England region (0.6 percent, as shown in Table IV).
The estimated percent increase in payments per discharge from RY
2010 to FY 2011 for New England is largely attributable to the
projected increase in estimated HCO and SSO payments (explained in
greater detail above in section IX.A. of this Appendix).
In contrast, LTCHs located in the East South Central region are
projected to experience a slight decrease in estimated payments per
discharge from RY 2010 to FY 2011. The average estimated decrease in
payments of 0.1 percent for LTCHs in the East South Central region
is primarily due to estimated decreases in payments associated with
the proposed wage index because 50 percent of LTCHs located in this
region will have a proposed FY 2011 wage index value that is less
than their RY 2010 wage index value. Similarly, LTCHs in the South
Atlantic and West North Central are expect to experience no change
in payments primarily due to an estimated decrease in payment
because of the proposed FY 2011 wage index changes and the decrease
in the Federal rate.

e. Bed Size

LTCHs were grouped into six categories based on bed size: 0-24
beds; 25-49 beds; 50-74 beds; 75-124 beds; 125-199 beds; and greater
than 200 beds.
We project that payments for small LTCHs (0-24 beds) would
experience a 0.8 percent increase in payments due to increases in
their wage index while large LTCHs (200+ beds) would experience no
change in payments. LTCHs with between 75 and 124 beds and between
125 and 199 beds are expected to experience an above average
increase in payments per discharge from RY 2010 to FY 2011 (0.6
percent and 0.5 percent, respectively) primarily due to a larger
than average estimated increase in payments from the proposed FY
2011 changes to the area wage adjustment.

D. Effect on the Medicare Program

As noted previously, we project that the provisions of this
supplemental proposed rule would result in an increase in estimated
aggregate LTCH PPS payments in FY 2011 of approximately $12.9
million (or about 0.3 percent) for the 421 LTCHs in our database.

E. Effect on Medicare Beneficiaries

Under the LTCH PPS, hospitals receive payment based on the
average resources consumed by patients for each diagnosis. We do not
expect any changes in the quality of care or access to services for
Medicare beneficiaries under the LTCH PPS, but we expect that paying
prospectively for LTCH services would enhance the efficiency of the
Medicare program.

X. Alternatives Considered

This supplemental proposed rule contains a range of policies.
The preamble of this supplemental proposed rule provides
descriptions of the statutory provisions that are addressed,
identifies policies and presents rationales for our decisions and,
where relevant, alternatives that were considered.

XI. Overall Conclusion

A. Acute Care Hospitals

Table I of section VI. of this Appendix demonstrates the
estimated distributional impact of the IPPS budget neutrality
requirements for the proposed MS-DRG and wage index changes, and for
the wage index reclassifications under the MGCRB. Table I also shows
an overall decrease of 0.9 percent in operating payments. We
estimate that operating payments will decrease by approximately $929
million in FY 2011. In addition, we estimates the reporting of
hospital quality data program costs at $2.4 million, a savings of
$23 million associated with the proposed HACs policies discussed in
the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, an additional
$150 million to hospitals that qualify for an additional payment as
provided under section 1109 of Public Law 111-152, and all other
proposed operating payment policies described in section VII. of
this Appendix . These estimates added to our FY 2011 operating
estimate of -$929 million results in a decrease of $800 million for
FY 2011. We estimate that capital payments will

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experience -0.2 percent change in payments per case, as shown in
Table III of section VIII. of this Appendix. We project that there
will be a $20 million decrease in capital payments in FY 2011
compared to FY 2010. The proposed cumulative operating and capital
payments should result in a net decrease of $820 million to IPPS
providers. The discussions presented in the previous pages, in
combination with the rest of this proposed rule and the May 10, 2010
FY 2011 IPPS/LTCH PPS proposed rule, constitute a regulatory impact
analysis.

B. LTCHs

Overall, LTCHs are projected to experience an increase in
estimated payments per discharge in FY 2011. In the impact analysis,
we are using the proposed rates, factors, and policies presented in
this supplemental proposed rule, including proposed updated wage
index values and relative weights, and the best available claims and
CCR data to estimate the change in payments under the LTCH PPS for
FY 2011. Accordingly, based on the best available data for the 421
LTCHs in our database, we estimate that FY 2011 LTCH PPS payments
will increase approximately $13 million (or about 0.3 percent).

XII. Accounting Statements

A. Acute Care Hospitals

As required by OMB Circular A-4 (available at http://www.whitehousegov/omb/circulars/a004/a-4.pdf), in Table V below, we
have prepared an accounting statement showing the classification of
the expenditures associated with the provisions of this proposed
rule as they relate to acute care hospitals. This table provides our
best estimate of the change in Medicare payments to providers as a
result of the proposed changes to the IPPS presented in this
supplemental proposed rule and the May 10, 2010 FY 2011 IPPS/LTCH
PPS proposed rule. All expenditures are classified as transfers to
Medicare providers.

Table V--Accounting Statement: Classification of Estimated Expenditures
Under the IPPS From FY 2010 to FY 2011
------------------------------------------------------------------------
Category Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers......... -$820 million.
From Whom to Whom...................... Federal Government to IPPS
Medicare Providers.
--------------------------------
Total.............................. -$820 million.
------------------------------------------------------------------------

B. LTCHs

As discussed in section IX. of this Appendix, the impact
analysis for the proposed changes under the LTCH PPS for this
proposed rule projects an increase in estimated aggregate payments
of approximately $13 million (or about 0.3 percent) for the 421
LTCHs in our database that are subject to payment under the LTCH
PPS. Therefore, as required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table VI below,
we have prepared an accounting statement showing the classification
of the expenditures associated with the provisions of this
supplemental proposed rule and the May 10, 2010 FY 2011 IPPS/LTCH
PPS proposed rule as they relate to changes to the LTCH PPS. Table
VI provides our best estimate of the proposed increase in Medicare
payments under the LTCH PPS as a result of the proposed provisions
presented in this proposed rule based on the data for the 421 LTCHs
in our database. All expenditures are classified as transfers to
Medicare providers (that is, LTCHs).

Table VI--Accounting Statement: Classification of Estimated Expenditures
From the 2010 LTCH PPS Rate Year to the FY 2011 LTCH PPS
------------------------------------------------------------------------
Category Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers......... Positive transfer--Estimated
increase in expenditures: $13
million.
From Whom to Whom...................... Federal Government to LTCH PPS
Medicare Providers.
--------------------------------
Total.............................. $13 million.
------------------------------------------------------------------------

XIII. Executive Order 12866

In accordance with the provisions of Executive Order 12866, the
Executive Office of Management and Budget reviewed this proposed
rule.

[FR Doc. 2010-12567 Filed 5-21-10; 4:15 pm]
BILLING CODE 4120-01-P